J.P. Marín-Arrese | The Fed’s message was tough enough, warning that the hiking cycle will go on unabated, even if it loses some steam, until inflation comes fully under control. The markets expected the quarter per cent rise in the Federal funds would prompt Powell to offset such a slowdown with a hawkish performance. Yet, in the press conference, he provided enough dovish hints to send the stocks bouncing back wholeheartedly. While pointing out that ‘the job was not yet done’, he conceded the disinflationary process was well underway. He also discarded recession as a likely threat, implicitly betting on a soft landing. Thus, Powell unravelled the Fed’s carefully drafted official stance. His wavering comments undid the clearcut message he was poised to deliver.
The Fed’s tightening job is far from over. Undoubtedly, the downward trend in energy and other inputs weighs heavily on headline inflation. It will witness a sharp fall in the coming months as the bulk of price pressures built at the beginning of last year. Yet, the core index will remain at high levels, hardly matching price stability. The acute imbalance in the labour market will further feed in the current sharp salary increases.
Investors are prone to take higher risks than warranted as the monetary policy seems poised to loosen its grip on the economy. While Powell claimed fund rates would rise until reaching a restrictive level and remain unchanged for the rest of the year, the markets bet they would ‘pivot’ before that deadline. Crossing the 5% frontier now seems less likely.
The current tightening has not decisively helped to bring down inflation. Yet, by watering down the Fed’s firm stance, Powell’s flabby performance hardly contributes to shoring up its credibility.
