President of the Federal Reserve Bank of America Jerome Powell has seemed like a nice man who doesn’t like to raise interest rates.
That is why the Helsinki stock exchange has also experienced a rapid rise until this year.
On Wednesday evening, however, Powell appeared in front of the media as a nasty man who wants to cause pain to investors.
Alice Cooperin No More Mister Nice Guy could have been playing in the background as Powell explained why the central bank is still raising the key rate by 0.75%. The central bank plans to eventually raise the interest rate to around 4.5 percent within a year, and keep it there for several months.
Share prices in the United States fell by 1.7 percent after falling by more than 20 percent since the beginning of the year. In Finland, the stock market opened for the fall on Thursday.
Which Powell’s coming out is so new and wonderful?
The fact that in the past Powell has emphasized “data dependence” in his rate hikes. As a result, investors have been waiting for the policy rate to gradually ease as inflation starts to decline.
Now, however, the message was that, in addition to a reduction in inflation, the condition for interest rates to fall is also the correction of the imbalance in the labor market and economic growth falling well below trend growth.
“No one knows if this will lead to a recession, and if it does, what kind of one,” Powell answered a question from the audience.
In other words, the Fed is not interested even if a recession comes. Monetary policy will “significantly” tighten the economy for a longer period of time. In the Fed’s forecast, growth will stop at 0.2 percent next year. Still, the interest rate rises.
So the Fed is not interested in the investor’s pain either. It can continue.
Market commentators according to Powell has found his “inner Volcker” after being a softie until now.
who led the Fed in the 1980s Paul Volcker was tough, taming the hyperinflation that had reached 15 percent with a policy interest rate of up to 20 percent. His predecessors had not dared to eradicate inflation completely, and the economy drifted into stagflation.
Now Powell wants to avoid widespread inflation becoming a problem for years, when inflation expectations get out of hand.
CNBC:n presenter Jim Cramer described the course of Powell’s thoughts in such a way that he now wants to give the investor a severe one-time suffering, after which there will be calm times again. Otherwise, raging inflation will eventually destroy investors’ real wealth much more, year after year.
The patch comes off so that the cheeks are hot – and not in long agony.
However, there is a risk here. The effects of monetary policy are visible with a delay, and historically fast interest rate increases can push the economy into a crisis that is not noticed in time.
Then the Fed would make its second mistake in Powell’s term. First, the Fed understeered inflation 1.5 years after the corona crisis and drove the economy into the swamp by talking about “temporary”. Next, the Fed may oversteer inflation and drive the economy into recession.
For the investor, the result is a roller coaster that terrifies the weakest.