Powell signals Fed pivot: Will the MPC follow suit?
Fed Chief Jerome Powell unambiguously stated at the Jackson Hole Economic Symposium that “the time has come for policy to adjust.” Clearly, barring unforeseen circumstances, the rate-cutting cycle in the US will start in September.
Powell’s comment, “the upside risk to inflation has diminished and the downside risk to unemployment has increased,” is, without any doubt, a more dovish message than the markets had expected.
Some experts feel that a 100 bps rate cut by the Fed is possible in CY2024. A more realistic scenario is a series of 25 bps rate cuts starting this month.
Fed wins the war on inflation
It is important to appreciate the fact that Powell’s bold statement comes out of his conviction that “inflation is on a sustainable path towards 2 percentage” and that “the upside risk to inflation has diminished.”
The conviction about the downward trajectory of inflation comes from a good analysis of the factors that led to the unexpected spurt in inflation, which peaked in the Summer of 2022, and the factors that drove it down.
Accepting that the ‘transitory inflation’ thesis, which the Fed espoused in the early stage of inflation break-out, was wrong, Powell explained that the pandemic-related shocks to supply and demand and severe shocks to commodity and energy markets were important drivers of inflation.
Now, that these triggers have been reversed, inflation is clearly on the downtrend. Fed’s restrictive monetary policy, by curtailing demand, accelerated the disinflationary trend.
In brief, Powell’s
