Some of these changes appear structural and permanent, as the pandemic disrupted global supply chains and governments and businesses responded to vulnerabilities exposed by COVID-19.
China’s pre-pandemic rise and dominance, especially in consumer goods, built on low labor costs and an increasingly globalized trade environment, were the main drivers of decades of unusually low inflation.
China’s idiosyncratic and ineffective response to the COVID outbreak and the start of the separation of the US and Chinese economies, amid heightened geopolitical tensions, have led to both supply chain issues and structural changes occurring in global trade. has been added to
Then, of course, there was Russia’s invasion of Ukraine, which had a dramatic impact on global energy and food markets. Europe will not allow itself to become dependent on Russian energy again.
US interest rates need to go higher and stay high longer.
Even when Powell delivered his speech last year, it was clear that the Fed was too complacent and misread the nature of the inflationary spiral. Subsequent events compounded the damage of that miscalculation, and the Fed’s late recognition of its mistake came too late to prevent US inflation from peaking above his 9%.
So Powell and his colleagues now seem to acknowledge that U.S. interest rates need to be raised further, and even if that leads to rising unemployment or even outright unemployment, they’ll be spending longer than they otherwise would. It means we have to maintain high standards. A raging recession.
Given the sluggish monetary policy tools of interest rates and credit availability, the Fed will have to squelch demand to match the decline in supply.
Powell on Friday referred to the US experience in the early 1980s, after the Fed made a number of half-baked attempts to bring inflation down after the oil shocks of the 1970s. st.
He engineered a recession in which U.S. unemployment peaked in double digits before inflation, unemployment trended downward, and ushered in decades of low inflation.
“Our aim is to avoid that outcome by acting decisively now,” Powell said at Jackson Hole.
“We are taking strong and swift steps to contain demand, make it more consistent with supply, and stabilize inflation expectations. increase.”
He interpreted his comments as a 3.4% drop in the S&P 500 index and a 3.94% drop in the tech-heavy Nasdaq, making investors reconsider their expectations of the next soft landing for the US economy. may be Year.
But investors don’t seem to have fully embraced the narrative of the Fed holding interest rates longer, regardless of the economic and market implications. Down 5.7%, it’s still about 10% above where it started the year.
Investors remain relatively optimistic about prospects for avoiding recession and rate cuts in the second half of next year Tantrums over rising interest rates and shrinking liquidity.
Of course, the Fed and Chairman Jerome Powell will have to stick to their new hardline stance if they are to regain the credibility they lost to misreading last year’s events.
The next meeting of the Fed’s Open Market Committee, scheduled for the end of September, could be significant. Powell has previously suggested the Fed could hike rates too hot after raising rates by 75 basis points at the last two meetings of the committee. The market was pricing in a 50 basis point gain next month.
“Our decision at our September meeting will depend on the totality of incoming data and the evolving outlook,” Powell said on Friday, adding that “at some point a slowdown could occur as the stance of monetary policy tightens further.” It is likely that it will be appropriate to do so,” he added. pace of increase”.
There are some signs that global supply chains have improved and US inflation has peaked. It dropped from 9.1% in June to 8.5% in July. But it’s still far from the Fed’s target of about 2%.
If Powell and the Federal Reserve get nervous, it will be a huge pain for economies and markets outside the United States, given the role that U.S. interest rates and the U.S. dollar play in the global financial system, as well as U.S. businesses and households. prize. Belatedly be assured that US inflation is finally firmly under control.
Our Business Briefing Newsletter delivers headlines, exclusives and expert opinion. Sign up to pick up weekday mornings.