FED: the pain is greater if there are no restrictions

Despite the consequences that the constant rises in interest rates will have on companies and households, the “pain” would be greater if a restrictive monetary policy is not maintained to reduce inflation, as defended yesterday by the president of the Federal Reserve Jerome Powell.

“Historical records strongly warn against premature easing of monetary policies,” Powell pointed out at the opening of the Jackson Hole (Wyoming, USA) meeting of economic leaders.

In a short but forceful speech, the president of the US central bank advanced that restoring price stability “will probably require” maintaining a “restrictive” monetary stance for some time.

And “at some point” – not yet estimated – it will be advisable to “moderate the pace of increases” in interest rates, he acknowledged.

Powell recalled that in July, after raising rates 0.75 points (the fourth increase in rates in a row and the second in a row of the same amount), he warned of another possible “unusually large increase” in September, but this Friday he conditioned the possible rise to the evolution of the data and the economic outlook.

Behind closed doors

Powell’s speech is the main attraction -and the only public intervention, the rest is behind closed doors- of this meeting in which governors of central banks, heads of institutions and company directors participate, and which takes place within the framework of a runaway world inflation as a consequence of the War in Ukraine and the aftermath of the pandemic.

With the theme “Reassessing the restrictions in the economy and politics”, the participants debate until this Saturday on topics such as the economic restrictions produced during the pandemic or how supply considerations have returned to the center of the stage.

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All this with high inflation and its need to reduce it as central axes.

“Central banks can and should take responsibility for low and stable inflation,” Powell said, defending the decisions of the US regulator, which has been much more aggressive than other central banks in its fight against inflation.

The European Central Bank has only approved, for the time being, a rise in rates of half a point, up to 0.50%, the first in 11 years.

Although continuing to raise rates will cause some “trouble for households and businesses,” Powell acknowledged, failing to do so would cause “much greater pain.”

“We must continue until the work is done,” stressed Powell, who in his macroeconomic analysis considered that the US economy continues to show a “strong” moment, as strong as its labor market.

He did warn, however, that there is still an imbalance in the labor market right now, because the jobs that companies have to fill are “substantially” more than the number of workers available to fill them.


After the speech at the FED

Fallen bags.

European stock markets fell sharply yesterday after the speech by US Federal Reserve Chairman Jerome Powell, who strongly reaffirmed the priority of combating inflation even at the cost of economic growth.

IMF Director.

Gita Gopinath was hopeful that central banks can contain inflation in the next two years, but warned that one of the biggest risks is that inflationary expectations soar…

and stop being linked to data and analysis about the reality of the economy.

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