Powell Speaks: Rate Hikes Appropriate, No Risk Of Overheating; Strong Economy To Continue

The day’s most anticipated moment arrived when moments ago Fed chair Jerome Powell released his speech titled “Changing Market Structure and Implications for Monetary Policy” which appears to have no surprises, and underscores the Fed’s gradualist policies and highlights the same key themes the Fed touched in its latest minutes, to wit it expects the “strong economy to continue” and since there “does not seem to be elevated risk of overheating“, the “gradual process of normalization [i.e. rate hikes] remains appropriate”.

“The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one,” Powell said. “My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent”.

“There is good reason to expect that this strong performance will continue,” Powell said adding “I believe that this gradual process of normalization remains appropriate.”

Powell also says that there are no clear signs of inflation accelerating above 2% (even those core CPI is now 2.4%), and curiously, Powell even explicitly cited Draghi saying:

As Brainard made clear, this is not a universal truth, and recent research highlights two particularly important cases in which doing too little comes with higher costs than doing too much. The first case is when attempting to avoid severely adverse events such as a financial crisis or an extended period with interest rates at the effective lower bound.

In such situations, the famous words “We will do whatever it takes” will likely be more effective than “We will take cautious steps toward doing whatever it takes.” The second case is when inflation expectations threaten to become unanchored. If expectations were to begin to drift, the reality or expectation of a weak initial response could exacerbate the problem.

I am confident that the FOMC would resolutely “do whatever it takes” should inflation expectations drift materially up or down or should crisis again threaten.”