Federal Reserve Chair Jerome Powell said he thought it was “fairly likely” that forces of deglobalization would increase, leading to a more fractional new normal characterized by higher inflationary pressures, lower productivity and slower economic growth.
Powell made the comments June 29 during a panel discussion at the European Central Bank’s annual policy forum in Sintra, Portugal.
“We’ve been going through a period of disinflationary forces around the world — that’s globalization, aging demographics, low productivity, technology that makes it all possible,” Powell said, describing it as a world where inflation generally “wasn’t a problem” in the most advanced economies.
“Since the pandemic, we’ve lived in a world where the economy is being driven by very different forces, we know that,” he continued, noting that it remains unknown whether and when things will return to a previous disinflationary environment yes, to what extent.
“We suspect it’s going to be some kind of mix,” the Fed chair said.
“In between, we’ve had a series of supply shocks, we’ve had very high inflation globally, certainly in all advanced economies, and … we’re learning to deal with that,” he said, coming with his remarks as central banks around the world are generally of caught unawares by persistently high inflation and rushed to tighten loose monetary conditions to stem rising prices.
“Certainly a possible outcome”
Powell said the Fed’s task of achieving price stability and maximum employment in this new normal with new forces at work has been a “much different exercise” than the Federal Reserve has had over the past 25 years, while hinting that a slower economic growth would be an inevitable compromise in fighting inflation.
“For example, if we see a re-division of the world into competing geopolitical and economic camps in a reversal of globalization, that certainly sounds like lower productivity and lower growth,” he said.
“That’s certainly a possible outcome, and I think, to some degree, likely, a likely outcome,” Powell said.
Asked by the panel’s moderator if the US economy could withstand a “rush” of rate hikes, Powell replied that the US economy was in “pretty strong shape,” citing factors such as high household savings and a tight labor market.
He added that the goal of the Fed’s rate-hiking cycle is “moderate” economic growth, calling it a “necessary adjustment” aimed at reducing demand in the US economy and making it more closely matched to supply.
“Right now, supply and demand are really out of balance in many parts of the US economy, the job market is a good example of that,” he said, with the current unemployment rate at 3.6 percent and about two open positions for every job seeker .
“We need to balance them better to allow inflation to come down,” he added, implying that the Fed is willing to tolerate some labor market pain as the price for inflation to cool.
“No guarantee” for a soft landing
Powell said he sees “ways” for the Fed to achieve a so-called soft landing, where inflation falls but unemployment doesn’t rise significantly, although he added that “there’s no guarantee we’ll get there.” .
“We think we can do that,” Powell said, but “obviously it’s something that’s going to be quite a challenge.”
Powell’s comments follow recent comments from other Fed officials indicating that the central bank believes its current aggressive monetary tightening cycle is necessary to quell inflation and will result in a slowdown in economic growth – but that a recession is not inevitable is.
Cleveland Fed President Loretta Mester, a voting member of the rate-setting Federal Open Market Committee (FOMC), said in a Wednesday interview on CNBC that the Fed is “only at the beginning” of its rate-hike effort and that it is carrying out the risk of a recession.
Notwithstanding the possibility of an economic contraction, Mester insisted the Fed must continue raising rates “briskly” and that to get inflation under control the central bank may need to side with tighter financial conditions.
“We are now on track to take our interest rates to more normal levels and then probably a bit higher into hawkish territory,” she told CNBC.
What Mester described as a “bumpy ride” toward tighter financial conditions would likely push the unemployment rate up to between 4 and 4.25 percent from the current 3.6 percent over the next two years, she predicted.
New York Fed President John Williams said in a separate interview on CNBC that he too sees a recession risk, although it’s not his “base case.”
Williams predicted the US economy would slow its pace of growth to 1 to 1.5 percent for the full year, calling it a “slow down that we need to see in the economy to really address the inflationary pressures that we have.” reduce and bring down inflation. ”
The Fed raised rates by 75 basis points at its last meeting, with fed fund futures contracts putting the probability of another 75 basis point hike at the next monetary policy meeting in July at 89.1 percent. This would increase the reference interest rate for overnight deposits from the current 1.50 percent to 1.75 percent to a target range of between 2.25 percent and 2.50 percent.
Mester said the Fed will likely need to keep interest rates at a final rate of between 3 and 3.5 percent.
Fed Dovish Pivot?
Nick Reece, VP of macro research and investment strategy at Merk Investments, told The Epoch Times in an emailed statement that market expectations for Fed rate hikes have shifted.
“The expected peak of the Fed’s rate hike cycle has shifted higher and earlier over the past month: from an expected peak in mid-2023 at around 3.25 percent to late 2022 at 3.75 percent,” he said.
However, Reece added that history shows that the Fed’s rate hike cycles typically don’t last as long or go as high as markets expect and that “indeed, the Fed’s dovish turn may already have begun.”
He pointed out that two-year government bond yields rose to 3.45 percent a few weeks ago and have since fallen to around 3 percent.
“The 2-year yield typically peaks at or before the peaks of the Fed’s rate hike cycle and above the peaks of the rate hike cycle,” he said, and his comments come as market watchers try to predict when the Fed will bounce back from tightening Averting policy and adjusting portfolio allocations to take advantage of the phase shift.