By Tom Burnett CFA
On June 22, 2022, Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee. In his prepared remarks, Chairman Powell stressed that fighting inflation is the main Fed priority. The Fed uses the Personal Consumption Expenditures definition of price movements not the more well known CPI and PPI information. The PCE prices rose 6.3% in the year ended April while the core (excluding food and energy) PCE prices rose 4.9% in that year period. The Fed has a well stated, publicly announced goal of 2.0% for PCE prices and will do whatever it takes to get prices down to that level. He admitted that the inflation risks were not well predicted and that it will take time to tame the inflation dragons.
His view is that the overall economy is strong with unemployment low, giving the Fed the opportunity to slow down growth expectations as a way of curbing the inflationary pressures. The economy was weaker than expected in the first quarter, but recent activity suggests that growth picked up substantially in the June quarter. The consumer is well financed and looking to spend-he is more concerned with slowing business investment which is the result of higher interest rates which are expected to continue rising. The Fed has raised the basic short-term interest rate and will keep on doing it until progress on inflation is evident. In addition, in May the Fed began to shrink its $9 trillion balance sheet which will add upward pressure to the interest rate environment. In the U. S. economy, the demand for labor is high and wages continue to grow, giving the Fed room to be aggressive with interest rate increases without putting a damper on employment.
On balance, the Fed is very serious about its intention to bring down inflation. It will continue to be transparent in its major policy decisions and it expects the inflation numbers to begin tapering off in the near future. His remarks conclude with the observation that the economy is strong and can take the higher rate environment without slipping into a recession.
Tom Burnett CFA is Director of Research