The dollar will not chase cheapness – Newspaper Kommersant No. 157 (7358) of 08/29/2022

The US Federal Reserve intends to continue tightening monetary policy, although it will take more time for prices to normalize, which will lead to a cooling in growth rates, the head of the regulator, Jerome Powell, said at the annual conference in Jackson Hole, not ruling out another significant rate hike at a meeting in September. The Fed fears that premature easing of policy will lead to a change in expectations and will not allow reaching the target, despite the slowdown in price growth in July.

Fed Chairman Jerome Powell, speaking at the annual banking conference in Jackson Hole, said that the main goal of the regulator is to return inflation to 2%. “Price stability is the foundation for the functioning of the economy, without it the economy does not work for anyone,” he added, noting that the process of price normalization “will take some time” and will be accompanied by a period of lower growth rates.

Recall that following the results of the July meeting, the Fed raised the rate immediately by 0.75 percentage points (p.p.) – up to 2.25-2.5%, which is in line with the long-term benchmark for the rate, but “taking into account the state of the labor market, achieving a long-term the neutral rate is not the place to stop or pause the process,” said Jerome Powell. Since March, the regulator has already raised the rate by a total of 225 basis points. Another significant rate increase may occur at the Fed meeting in September, but the regulator will take into account data on the state of the economy. “We are now approximately in the middle of the road, at some point it will be appropriate to slow down the pace of the rate increase,” the head of the regulator added.

According to Mr. Powell, the current inflation is a consequence of high demand with a compressed supply, and the regulator’s tools are aimed precisely at aggregated demand, which “needs to be brought into line with supply.” The Fed’s fears are related to a change in long-term expectations – in this case, delays in tightening policy only complicate the process of getting out of the phase of high price growth.

US inflation has already begun to slow down in July: the figure fell to 8.5% from a record high of 9.1% in June (core inflation remained unchanged at 5.9%). The consumer price index, which the Fed focuses on, fell by 0.1% in July after rising by 1% in June, in annual terms, the indicator fell from 6.8% to 6.3% (excluding energy and food – from 4 8% to 4.6%). “An improvement over one month is not enough to confirm a downward trend in inflation for the committee,” the Fed chief said, adding that early policy easing could be dangerous. Now the scatter chart with the forecasts of the committee members (it was published in June) assumes an increase in the rate this year to 3.25-3.5% (three meetings are scheduled before the end of the year), in 2023 – up to 3.5-3.75% . The schedule will be revised again in September.

Note that the US GDP in the second quarter, according to adjusted data, decreased by 0.6% (the first estimate is 0.9%) year on year (that is, if the indicator changed at the same pace throughout the year) after a decline of 1 .6% in the first quarter. The unemployment rate in July, however, also decreased – from 3.6% to 3.5%, 528 thousand jobs were created during the month, which allows the Fed to increase the rate more actively. The S&P Global Purchasing Managers’ Index PMI, meanwhile, indicates a decline in business activity in the economy: in August, its value fell to 45 points from 47.7 points a month earlier (a value below 50 points indicates a decrease in business activity, higher indicates growth) .

Tatyana Edovina