As Biden Prepares to Tout Economy, Fed Chair Powell Takes a Cautious Tone
To try to slow the economy and choke off inflation, policymakers raised interest rates from near zero early last year to more than 4.5 percent at their last meeting, the quickest pace of adjustment in decades. Higher borrowing costs weigh on demand by making it more expensive to fund big purchases or business expansions. That in turn tempers hiring and wage growth, with further cools the economy.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Mr. Powell had hinted during a news conference last week that the Fed was discussing a couple of more rate increases and could do more if needed. He also underlined that the central bank would leave interest rates high for some time. But those comments came before the release of a blockbuster January employment report.
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Still, Mr. Powell seemed to reinforce that basic plan on Tuesday, and said that if inflation remained high or the job market stayed strong, “it may well be the case” that the Fed would have to raise rates more than markets currently expected. Stock indexes initially jumped as Mr. Powell spoke, then plummeted, and then jumped again as investors tried to parse his remarks.
“Powell leveraged the employment report to lend credibility to the hawkish elements of the February message,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, wrote in response to the speech. Hawkish means tilted toward higher interest rates.
But he “was far from max hawkish,” Mr. Guha continued, explaining why investors were relieved after the speech.
Still, Mr. Powell called getting inflation back down “the biggest challenge” facing the Fed, and noted that in the services sector of the economy — which includes industries such as restaurants, travel and health care — “we’re not seeing disinflation yet.”
Fed officials aim for 2 percent inflation on average over time. Their preferred inflation measure remains much higher than that, at 5 percent, though that is down from a peak of about 7 percent last summer.
Article source: https://www.nytimes.com/2023/02/07/business/economy/powell-fed-chair-comments.html