On February 1st, 2023, Federal Reserve Chairman Jerome Powell held a press conference to provide an update on the state of the US economy and to announce the Federal Open Market Committee’s (FOMC) decision to raise the policy interest rate by 25 basis points.
In his opening statement, Powell highlighted the difficulties that high inflation is causing for the American people and emphasized the Federal Reserve’s commitment to bringing inflation down to its 2 percent goal. He noted that the Fed has taken forceful actions to tighten the stance of monetary policy over the past year and that these actions will have a full effect in the future. However, Powell also acknowledged that there is still work to be done to restore price stability and maintain a restrictive stance for some time.
Powell then reviewed the state of the US economy, stating that the economy slowed significantly in the past year with real GDP growing at a below-trend pace of 1 percent. He reported that consumer spending is expanding at a subdued pace, partly due to tighter financial conditions, and that the housing sector continues to weaken. On the other hand, the labor market remains extremely tight with the unemployment rate at a 50-year low, high job vacancy, and elevated wage growth.
Inflation Targeting Policies
In terms of inflation, Powell acknowledged that inflation remains well above the Federal Reserve’s 2 percent goal, with total PCE prices rising 5.0 percent and core PCE prices rising 4.4 percent over the 12 months ending in December. However, he reported that there have been welcome reductions in the monthly pace of increases in inflation over the past three months. Despite these encouraging developments, Powell stated that the Federal Reserve will need more evidence to be confident that inflation is on a sustained downward path.
Powell emphasized the importance of price stability and the responsibility of the Federal Reserve to promote maximum employment and stable prices for the American people. He noted the hardships that high inflation imposes, particularly on those who are least able to meet the higher costs of essentials like food, housing, and transportation. He also emphasized the Fed’s attention to the risks that inflation poses to both sides of its mandate and its strong commitment to returning inflation to its 2 percent objective.
The FOMC’s decision to raise the policy interest rate by 25 basis points brings the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. Powell noted that this marks a 4-1/2 percentage point increase in interest rates over the past year and that ongoing increases will be necessary to attain a restrictive stance that returns inflation to 2 percent. He also reported that the Fed is continuing the process of significantly reducing the size of its balance sheet.
Upcoming Monetary Policies
In light of the cumulative tightening of monetary policy and its lags, the FOMC decided to shift to a slower pace of interest rate increases, as per the recent press conference. This will allow the Committee to better assess the economy’s progress toward its goals and determine the extent of future increases required. Powell emphasized that the Fed will continue to make decisions meeting by meeting, taking into account incoming data and its implications for the outlook for economic activity and inflation.
The overall focus of the Fed’s monetary policy actions is to bring inflation back down to its 2 percent goal and to keep longer-term inflation expectations well anchored. Powell acknowledged that reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. However, he emphasized that restoring price stability is essential to set the stage for achieving maximum employment in the long run.
In conclusion, Powell’s press conference emphasized the Federal Reserve’s commitment to restoring price stability. But, this may likely have large impacts on financial markets, including the crypto market.