Powell Leads Global Central Bankers' Consensus On Inflation: More Rate Hikes Needed

The four major global central bankers — Fed Chair Jerome Powell, European Central Bank Governor Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Japan Governor Kazuo Ueda – convened in Sintra, Portugal, for the ECB Forum on Wednesday. While the BoJ’s Ueda stuck to his outlier dovish position, the other three were in agreement that more rate hikes were necessary to combat inflation.

Chair Powell remarked that there was quite a strong majority of Fed governors determined on raising interest two more times in 2023, adding that a strong and resilient labor market is one of the key reason keeping Fed policymakers in a hawkish position.

Powell Doesn’t Rule Out Consecutive Rate Hikes: Dollar Jumps

Answering a question on whether the Fed will hike at every other meeting, Powell said that he wouldn’t rule out moving at consecutive meetings, causing a jump in the expectations for a back-to-back hike in September.

Powell reiterated his hawkish stance, saying that “there is still a risk of doing too little rather than too much,” that “the social costs of failing to restore price stability will be higher,” and that “the longer inflation remains high, the greater the risk of it becoming entrenched.”

“I don’t see core inflation going to 2% neither this year nor the next.”

The CME Group FedWatch Tool currently assigns an 85% chance of a 25-basis-point raise in July, the highest thus far, and the chances of another 25-basis-point boost in September increased from 15% to 21% after Powell’s statements.

The dollar rose, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, up 0.5%, while the S&P 500 Index, as represented by the SPDR S&P 500 ETF Trust SPY, was basically flat for the day.

In response to a question about whether the stock market is currently fighting the Fed, Powell said, “you can’t fight the Fed,” before quickly clarifying that the “Fed targets broader financial conditions” rather than any one market in particular.

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Chart: Dollar Rises, Stocks Remain Flat After Powell’s Speech

Powell Not Satisfied With The Inflation Trend: Softer Job Market Is Needed

Powell welcomed the recent improvement in headline inflation, thanks to lower energy and goods prices. However, when it comes to underlying inflation, the Chair warned that disinflation from rents will take time, and he hasn’t seen the expected progress on non-housing services, such as hotels, restaurants, health care, and financial services, which account for 50% of core inflation.

Powell stated that the labor market’s supply and demand must be better aligned. He added that the number of job opportunities continues to outnumber the number of unemployed, but that this mismatch is somewhat improving. Both job creation and salary pressures are starting to ease.

Powell: Recession And Commercial Real Estate Represent The Risks Down The Road

Although not included in his baseline forecasts, Powell said he recognizes the possibility of an economic recession.

The Chair also spoke on the risks associated with the commercial real estate (CRE) sector, stating that it was not the basis for the Fed’s halt in June and that banks with less than $100 billion in assets are the most likely to be exposed to CRE.

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Photo: Federal Reserve