Federal Reserve Panic: Are We Headed For Economic Disaster?

By Alan Hume | Wednesday, 10 July 2024 09:30 AM
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Federal Reserve Chair Jerome Powell voiced his apprehensions on Tuesday about the potential risks of maintaining high interest rates for an extended period, warning that such a policy could potentially undermine economic growth.

Powell's comments come as he prepares for a two-day session on Capitol Hill this week, where he will discuss the current state of the economy and the labor market, both of which he asserts remain strong despite recent signs of slowing down.

According to CNBC, Powell highlighted a slight decrease in inflation, a trend that he assured policymakers are committed to reducing to their target of 2%. However, he also warned of the dangers of complacency, stating, "Reducing policy restraint too late or too little could unduly weaken economic activity and employment."

These remarks come as the Federal Open Market Committee (FOMC) approaches the one-year anniversary of its last increase in benchmark interest rates. Currently, the Fed's overnight borrowing rate stands between 5.25% and 5.5%, the highest in nearly 23 years, following 11 consecutive hikes after inflation reached its peak since the early 1980s.

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Market analysts predict that the Fed will start to cut rates in September, with a likely additional quarter percentage point reduction by year's end. However, FOMC members suggested only one cut at their June meeting. Powell and his colleagues have recently indicated that the latest inflation data has been somewhat promising after an unexpected surge at the beginning of the year. The Fed's preferred personal consumption expenditures price index recorded inflation at 2.6% in May, following a peak of over 7% in June 2022.

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"After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress," Powell said. "More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent."

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Powell's statement is part of the congressionally mandated semiannual updates on monetary policy. Following his prepared remarks, Powell will face questioning from members of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

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In previous appearances, Powell has avoided making dramatic policy announcements while skillfully sidestepping politically charged questions from committee members. This year's questioning could prove contentious as the volatile presidential campaign heightens tensions in Washington. Despite this, Powell has consistently emphasized that the Fed remains apolitical and refrains from taking policy positions outside of its own remit.

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Powell's other comments focused on the broader economy's relationship with policy. Recent data indicates a slight increase in unemployment and a decrease in broad growth as measured by gross domestic product. Both the manufacturing and services sectors reported contractions in June.

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Despite these indicators, Powell maintains that "the U.S. economy continues to expand at a solid pace" despite the deceleration in GDP, adding that "Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending."

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