Key Takeaways
- The FOMC announced a 0.25% hike in interest rates.
- Here are some key takeaways from Fed chair Jerome Powell’s speech.
NEW DELHI (CoinChapter.com) — The Federal Reserve announced the updated interest rate on March 22. The US central bank conformed with market expectations, raising interest rates by 0.25% to 4.75%-5%.
The FOMC’s decision was unanimous, with the raise coming against the backdrop of turmoil in the banking sector. However, the interest rate hike suggests the Federal Reserve remains optimistic about the revival of the troubled banking sector.
Here are some key takeaways from Fed Chairman Jerome Powell’s speech after the FOMC meeting.
1. “Banking System Sound and Resilient.”
Powell addressed the recent collapse of several US banks, highlighting the measures the Fed, FDIC, and the Treasury took to protect the contagion from spreading. Powell highlighted that the crisis impacted only a “small number of banks.”
However, Powell acknowledged that even “isolated” problems in a few banks could undermine depositor confidence in healthy banks. The Fed’s actions, including advancing loans to troubled banks, aim to protect the US economy.
Furthermore, Powell reiterated the FOMC’s statement, assuring depositors that the banking system remained “sound and resilient.”
Interestingly, the FOMC statement did not mention that the committee anticipated “ongoing increases” in interest rates. Market participants seem to take the omission as a suggestion of a slightly dovish Fed. As a result, the US dollar index dropped to 102 from 103.09 after the FOMC announcement.
Despite the Fed’s assurances regarding the health of the US banking system, the dovish approach could make investors cautious. Moreover, Powell remained vague about the banking stress’s impact on credit availability.
However, the Fed chair acknowledged that the banking sector turmoil might bleed into households and businesses, “which would, in turn, affect economic outcomes.“
2. Inflation Remains High, Labor Market Very Tight — Powell
Powell stated that inflation remained “too high,” and the Fed committed to lowering the consumer price index to 2%. Furthermore, the FOMC members believe the subdued economic growth will likely continue.
Despite the bleak outlook for GDP, Powell maintained that labor markets remained “extremely tight” as employment rose steadily over the past three months. Yet, employment data might become a misleading metric.
Some people might hold two or more jobs, so while the number of jobs increased, it benefitted individuals. However, the unemployment rate slid lower in Feb, hinting that the economy might be on the mend.
The FOMC members expect the gap between labor supply and demand will ease over time, lowering the upward pressure on wages.
The Fed chair did not put much stock in increased consumer spending, with the Fed chair attributing part of the rise to “swings in the weather.”
Powell reflected on the importance of inflation in maintaining price stability, which is vital for long-term growth.
3. Disinflation Underway — Powell
In February, Fed chair Powell had claimed that disinflation — a decline in the rate of rise of inflation — had begun.
Powell highlighted that PCE (personal consumption expenditure) inflation, or the price of goods and services, has decreased over the past six months. The FOMC forecasts that the median PCE will decline to 3.3% by 2023-end and reach 2.1% by 2025.
Goods inflation has been coming down now for six months. It’s proceeding more slowly than we would have liked, but it’s certain proceeding.
Jerowme Powell said in a statment.
Powell accepted that the housing sector remained weak, thanks mostly to the rise in mortgage rates. However, housing and goods inflation command a large share of the core PCE index.
However, inflation in the non-housing services elements of the PCE basket refused to soften. The Fed stated that disinflation in non-housing services would come with softening consumer demand and loosening labor market conditions.
Powell stated that the measures to bring inflation might be risky, but failure to rein in inflation might prove riskier. As a result, it seems likely that the interest rate would remain high for 2023, despite the slightly dovish hints coming from the latest FOMC announcement.
