Speech by Fed Chairman Powell warns of unpopular decisions to appease price stability


Key learning points

  • Federal Reserve Chairman Jerome Powell made comments at a symposium in Sweden on Jan. 10 that, taken out of context, could be seen as precursors to the Fed’s unpopular policies in the coming months.
  • In reality, the Fed has been transparent about upcoming rate hikes. There is nothing new about what Powell said in Stockholm.
  • Everyone is on the edge of their seats, waiting for what the Fed will do. However, any of the Fed’s plans can easily be disrupted by disruptions in the global economy.

When taken out of context, the words spoken by Jerome Powell on January 10, 2023 feel ominous:

“…restoring price stability when inflation is high may require measures that are unpopular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without regard to short-term political factors.”

Does this mean that the Fed will raise rates even further or at a rate that is not in line with public opinion? Here’s what you need to know – and how Q.ai can help you in uncertain times.

International Symposium on Central Bank Independence

We already knew the answer to that question before 10 January. The Fed plans to continue raising rates in 2023 and aims for inflation at or below 2%.

We do not know at what rate these rate hikes will continue, but it is reasonable to assume that further rate hikes will not be politically popular.

However, context tells us a lot in this case. Powell spoke at a symposium in Sweden on January 10. This symposium was specifically devoted to the topic of central bank independence.

While the American public rightly hangs on to Powell’s every word, examining these particular statements at anything other than face value may be overreaching. Powell outlined the widely accepted need for central bank independence.

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Ultimately, bank leaders cannot be political, as the policies they may have to implement, including rate hikes to fight inflation, may not be politically popular.

Powell’s popularity

Overall, rising rates are likely to be unpopular with several stockholders, particularly US consumers. Higher rates mean higher borrowing costs, whether for a home, vehicle, or other financing needs.

Higher rates can also hurt the economy. If they become serious enough, they could lead to a recession that affects the labor market. Right now, the US job market is incredibly strong despite rising rates.

Whether Powell is popular or not is a moot point because, as the chairman himself points out, central bank independence depends on Federal Reserve officials not having to worry about elections or remain politically popular. They just have to do the right thing to stabilize prices, even if that monetary policy is unpopular.

While this general concept is always true, everyone is tuned into it because inflation is so high. This is exactly when the Fed’s decisions are unlikely to be popular, even if they are arguably necessary.

If Powell had made the same statements five years ago, they would have been just as true, but no one would have raised an eyebrow. This is because, in low interest rate environments, telling the truth does not lend itself to immediate financial worry or unpopularity.

What we can expect from future rates

The Fed and Powell have been transparent that their work is not done. Although inflation is currently on a downward trend, it is still at 6.5% according to the latest reading. This number is not the 9.1% we saw in June 2022, but it is still incredibly high.

We can expect monetary policy to continue until inflation is at or below 2%. The big question right now is the severity of interest rate hikes in the near future. Specifically, economists are trying to guess whether the increases will be 25 or 50 basis points in early February.

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Unknown variables after February

There are a few other variables that could affect rate hikes by the Fed. Consumers should be aware of the following.

Policy and Trade in China

In the West, China’s zero-COVID policy has been criticized for its strictness. There was hope that when they were reversed, China’s economy would recover from the 2022 slump.

However, when the People’s Republic reversed its coronavirus policy in December, we saw the exact opposite. With mass deaths spreading across the country, many businesses closed and citizens chose to stay at home, further slowing the economy.

Before the pandemic, China’s economy accounted for 35% to 40% of global growth. If the economy is not operating at full capacity, global trade will be adversely affected and supply chains may be further hampered. When supply chains are disrupted, they are unable to meet demand, potentially driving up inflation.

This result is not guaranteed. The economy may correct itself, but the uncertainty makes the future of inflation and the intensity of the Fed’s rate hikes uncertain in 2023.

Further concerns about trade with China and how it could affect supply chains stem from US trade policy. We have already seen a negative impact on the tech sectors from these trade policies in 2022. Depending on diplomatic relations, they could persist, deteriorate or be weakened over the next year.

The conflict between Russia and Ukraine

Another great unknown is the Russian invasion of the sovereign country of Ukraine. This conflict has led many Western countries, including the US and large parts of the EU, to impose sanctions on Russian trade. In particular, the effect has more of an impact on the EU economy, where Russian oil was a huge source of energy.

This could still impact US markets, even if the impact is less than that of our neighbors across the pond.

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It will be interesting to see how much international support for Ukraine continues. Many nations try to walk a fine line between providing support and not trying to provoke Moscow into starting World War III. Whatever happens is likely to affect markets and Fed decisions.

America’s employment sector

The economies of China, the US and the EU are the three largest in the world. The International Monetary Fund (IMF) has sounded the alarm in recent months over fears of a global recession as all three economies have slowed recently.

It cites the US job market as the potential savior of the world or an ointment that could take the edge off. The hot US labor market is an outlier in these turbulent economic times, but if it remains strong, it could provide stability in an otherwise volatile world.

This is also a concern because while Powell acknowledges that wage growth has not been a primary factor in the high inflation rates we are seeing now, he has said he wants to see wage growth slow. He fears that if it starts growing again, it could erode the effects of monetary policy designed to fight inflation.

it comes down to

Powell’s statements may look inflammatory, but they were factual when judged in context. In a world where there is so much volatility and uncertainty, even the slightest indication of what the Fed might do could send some people into panic.

Investors appreciate certainty, but we live in very turbulent times. Even if the Fed had a plan set in stone for the next 12 months, geopolitical conflicts or foreign policy pandemics could disrupt those plans.

In times of uncertainty, you can protect your investments with an Inflation Kit or turn on Portfolio Protection for added peace of mind.

Download Q.ai today for access to AI-powered investment strategies.



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