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Today, Federal Chairman Jerome Powell addressed members of Congress to update them on the economy, inflation, and reasons for increasing the federal fund’s rate. Since your time is valuable, I have summarized and paraphrased the 2.5 hour meeting.
Background
As you likely are aware, the Federal Reserve announced that it would be raising interest rates 0.75 percentage points, following its June 14-15 meeting, bumping the federal funds rate to a target range of 1.50 to 1.75 percent.
The Federal Reserve has two mandates: maximum sustainable employment and price stability.
Summary Notes
After watching Federal Chairman Jerome Powell share his comments on inflation before the Committee on Banking, Housing, and Urban Affairs today, here is what I heard:
The Federal Reserve increasing the federal funds rate causes the following:
- Demand for interest rate sensitive items to decrease (vehicles/ housing)
- Asset prices in general to decrease
- Dollar to strengthen
Recent record inflation started before the Ukraine invasion and blaming it solely on Russia is not fair, nor correct.
The Federal Reserve decreasing the federal funds rate does not really affect the price of gas (energy) and food.
Fuel at the pump is primarily driven by two things: 1) prices set globally by large oil producing countries and cartels and 2) the oil refinement spread to convert oil into usable products (such as gas at the pump). Neither is controlled, nor can be controlled by the Federal Reserve.
Employment is extremely tight—meaning that the portion of candidates to available jobs is low and the competition to hire them can be fierce. Chairman Powell said that currently, there are two job vacancies for every one person looking for work.
According to Chairman Powell, the financial conditions and markets have already priced in the future anticipated interest rate increases that the Fed has indicated they will be doing over the foreseeable future. He said that markets are reading the Fed’s response well. According to the schedule, the Fed interest rates will likely be around 3.0% to 3.5% by the end of the year.
Powell, after listening to several Congressmen and Congresswomen share their constituent’s concerns about inflation, had this to say the following which I have paraphrased: Inflation destroys public confidence. We are using our tools and the public should believe that we will get it down to 2% over time. We can help with the demand side and can slow down the demand of goods and services by raising the federal interest rates.
Consumers have healthy balance sheets and continue to spend due to their savings. Consumers make up a healthy portion of our GDP. No one is very good at forecasting recessions and can’t do it consistently.
Conclusion
The Federal Reserve Board and board members have a tough job ahead of them. Their goal is to get inflation under control by dampening the demand for goods and services to allow the supply side to recover post-Pandemic. If they raise rates too high or too quickly, it could send the U.S. economy into a recession. If they don’t do anything, inflation can remain elevated and get into American’s psyche.
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