Federal Reserve Chair Discusses U.S. Economy and Monetary Policy
In a recent interview on Bloomberg TV’s “Wall Street Week,” Federal Reserve Chair Jerome Powell discussed the resilience of the U.S. economy and the impact of monetary policy. Speaking with host David Westin at an event organized by the Economic Club of New York, Powell highlighted key points about economic growth, interest rates, historical precedents, the long-term equilibrium rate, the real economy, inflation, and the bond market.
Economic Resilience and Consumer Spending
Powell emphasized the strong growth of the U.S. economy, which has defied previous predictions of a recession. He attributed this resilience to consumer spending, driven by a robust job market and high first-time nominal wages. With decreasing inflation, real wages have further encouraged spending.
Interest Rates and Economic Susceptibility
According to Powell, the economy may be less affected by interest rates compared to previous years. Companies with access to the bond market have extended their debt terms, making them less sensitive to rate hikes. Similarly, homeowners with long-term fixed-rate mortgages are not experiencing significant impacts from higher rates. However, sectors such as housing and durable goods purchases have been affected by interest-sensitive changes.
Historical Precedents and Future Rates
Powell acknowledged that predicting the future neutral level of rates is challenging due to factors like an aging global population and globalization. These factors have kept rates low for the past 25 years. The long-term impact of the pandemic on these factors remains uncertain.
Long-Term Equilibrium Rate
Discussing the long-term equilibrium rate, Powell mentioned that it has been steadily decreasing over decades. While its current level is unknown, it may have risen in the short term. However, its long-term trajectory remains uncertain.
Real Economy and Cost of Capital
Based on insights from CEOs, Powell shared that the rising cost of capital could have a more significant impact on smaller and early-stage companies despite the overall strength of the economy.
Monetary Policy and Inflation
Powell emphasized the Federal Reserve’s commitment to maintaining low and stable inflation. He acknowledged that higher interest rates have negative effects on sectors like homebuilding, but he stressed that price stability is the ultimate goal.
Bond Market and Policy Tightening
Powell noted that higher bond rates are affecting financial conditions, which aligns with the goals of monetary policy. He suggested that the movements in the bond market might reduce the need for further rate hikes by the Federal Reserve, although this is yet to be seen.
Hot Take: Federal Reserve Prioritizes Low and Stable Inflation
In his interview, Federal Reserve Chair Jerome Powell highlighted the resilience of the U.S. economy and discussed various aspects of monetary policy. Despite potential impacts on sectors like housing and durable goods purchases, Powell reiterated that delivering low and stable inflation remains the primary responsibility of the Federal Reserve. While there are uncertainties regarding historical precedents, future rates, and long-term equilibrium levels, Powell emphasized the importance of price stability in achieving economic goals.
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