On June 20th, Federal Reserve Chairman Jerome Powell cautioned that talk of cutting interest rates was premature and expressed openness to additional hikes if the strong economy and low inflation trajectory continues.
The remarks at a congressional hearing showed Powell’s underlying concern with the low unemployment rate which is now at its lowest since the year 2000, while inflation has remained above the target rate of 2%. In his comments, Powell also highlighted the fact that the federal funds rate, which is the benchmark over which the Federal Reserve sets short-term interest rates, remained 2.5% higher than it had been at the end of 2017.
These comments reflect a hawkish stance by the Fed which has largely held steady over the past year with a gradual increase in the federal funds rate from 1.25% to 2.5%. This steady approach has insulated the US economy from a potentially sudden shock caused by a steep increase in interest rates.
Powell also noted that the Fed is monitoring global economic indicators very carefully in order to make sure that the growth trajectory is not derailed by slowing economies in Europe and Asia.
The chairman’s remarks come at a time when investors are increasingly worried about a possible recession as global economic indicators point towards an impending downturn.
This uncertainty is reflected in stock market performance which has been volatile in recent weeks, with the Dow Jones Industrial Average and the S&P 500 index both recording declines of more than 5% last month.
The Fed Chairman’s comments have provided some clarity for investors and markets, but there is still a great deal of uncertainty surrounding the trajectory of the global economy. The Federal Reserve is keen to take various factors into consideration, including the effect of higher tariffs and protectionist policies being pursued by the Trump administration. It remains to be seen if the Fed will indeed raise rates if the economy remains stable and inflation remains under control.
