At a key economic meeting in Amsterdam on May 14, Fed Chairman Jerome Powell once again signaled his cautious approach to the US inflation situation to global financial markets. Powell stressed that while there is widespread expectation that inflation will come down quickly, the reality is that the process is slower than expected, which could force the Fed to maintain the current high interest rate environment for a longer period of time. This statement undoubtedly poured cold water on market participants who are counting on policy easing in the short term.
Since July 2023, the Federal Reserve has taken a decisive and aggressive monetary policy in response to persistently high inflationary pressures, setting the target range for the federal funds rate at 5.25%-5.5%, the highest level since 1991. The series of rate hikes is aimed at dampening demand by raising borrowing costs to control price increases, but it has also raised fears that economic growth could be hampered and even recessionary.
The market originally expected that after several consecutive rounds of interest rate hikes, as economic activity slows and inflation begins to show signs of cooling, the Fed may begin to gradually lower interest rates as soon as June this year to support the economy to avoid a hard landing. However, the recent release of the US Producer Price Index (PPI) and Consumer Price Index (CPI) has consistently exceeded market expectations, highlighting the stubborn side of inflation and forcing the market to reassess its projections for the Fed's policy path. Some economists have even put forward the extreme scenario that the Fed may be forced to start the rate hike cycle again, although this view has not become mainstream.
In his speech, Powell mentioned that although the April PPI data revealed that inflationary pressures remain severe, the data itself also shows some mixed and potentially positive signals, and some components seem to be easing. He made it clear that the Fed needs to see more than a quarter of stable data as a basis for policy adjustments as to whether inflation can continue to fall and reach acceptable levels. "We weren't expecting it to be a smooth road, but inflation was higher than we expected." Powell's remarks are actually a cooling of market expectations, emphasizing that monetary policy adjustments need to be based on adequate and sustained data support, rather than fluctuations on a single data point.
Behind this stance is the Fed's cautious approach to balancing inflation and economic growth. On the one hand, high inflation has a direct impact on the cost of living for ordinary people, eroding purchasing power, and may destabilize the economy in the long run. On the other hand, excessively tight monetary policy could lead to a sharp contraction in economic activity, triggering a rise in unemployment and even triggering a recession. Powell's reference to "the path to a soft landing" means keeping inflation under control while maintaining as smooth economic growth as possible, a goal he described as "very challenging."
The market is sensitive to Powell's latest remarks, not only in the volatility of financial asset prices, but also in the revaluation of the future path of interest rates. Investors and analysts are starting to analyze each piece of economic data in greater detail, trying to pick up clues as to the Fed's next move. In particular, the upcoming April CPI data is seen as a key indicator of short-term market sentiment and policy expectations.
To sum up, Powell's speech not only reaffirmed the Fed's determination to fight inflation, but also recalibrated market expectations. It reminds market participants that the adjustment of monetary policy is a dynamic and complex process that requires flexibility based on continuous feedback from economic data. In today's highly interconnected global economy, the Fed's decisions will not only affect the United States, but also affect the global financial markets and economic policies of various countries. Therefore, every public speech by Powell is regarded as an important bellwether for the direction of the global economy. In the new normal of slowing inflation and hovering high interest rates, global markets and economic actors need to prepare for a journey full of uncertainty.