Fed chair Jerome Powell has said that the US economy is “resilient” even as he talked about the need for restrictive monetary policy to tame inflation. He did not rule out rate hikes at consecutive meetings after previously pausing its rate hikes earlier this month.
Speaking at a monetary policy session in Sintra, Portugal, Powell said, “If you look at the data over the last quarter, what you see is stronger than expected growth, a tighter than expected labor market and higher than expected inflation.”
He added, “That tells us that although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.”
Powell talks about the need for more restrictive monetary policy
Powell said that he believes more monetary policy restriction is needed to tame inflation. The Fed embarked on its rate tightening cycle in March 2022 and raised its policy rates by 25 basis points – ending the zero-bound interest rates.
The Fed graduated to a 50-basis point rate hike at the next meeting. Thereafter the US central bank raised rates by 75 basis points at four consecutive meetings before lowering the pace to 50 basis points in December.
This year, the Fed has raised rates thrice by 25 basis points lifting the interest rates to multi-year highs.
In all, Fed raised rates at ten consecutive meetings bringing its policy rates to 5.0%-5.25%. It however paused the rate hikes in June but the dot plot showed that Fed members see another 50-basis point rate hike this year.
Powell said that the Fed paused its rate hikes amid the stress in the US banking sector amid the failures of SVB and Signature Bank.
He said, “Part of the decision, in my thinking anyway, was the bank stress that we experienced earlier this year.”
Powell added, “There’s a fair amount of research showing that when something like that happens, bank-credit availability and credit can move down a little bit, with a bit of a lag, so we’re watching carefully to see whether that does appear.”
Powell did not rule out the possibility of consecutive rate hikes
He said that Fed hasn’t yet decided on the trajectory and added “I wouldn’t take moving at consecutive meetings off the table at all.”
He repeated his previous stance that the strong labor market is aiding inflation.
Powell said, “Labor costs are really the biggest factor in most parts of that sector.” He added, “We need to see a better alignment of supply and demand in the labor market and see some more softening in labor market conditions so that inflationary pressures in that sector can also begin to subside.”
Notably, while there have been wide-ranging layoffs at US tech companies, the hiring activity elsewhere has been quite robust. The nonfarm payroll has averaged 314,000 per month in the first five months of the year – which is higher than historical averages.
The US economy has been resilient
Powell said that “The economy is resilient and still growing, albeit at a modest pace.” He however noted that a recession is “certainly possible” but that’s “not the most likely case.”
Recession fears have risen amid the Fed’s rate hikes. In the past, Fed said that while its rate hikes might lead to a recession, it is not trying to deliberately enforce one.
However, despite many observers predicting an imminent recession in the US, the world’s largest economy has held off relatively well.
Also, the Nasdaq 100 is headed for the best first-half performance in its 52-year history.
US tech stocks have rallied in 2023
Tech stocks have looked quite strong in 2023 and Nvidia is the top S&P 500 gainer this year followed by Meta Platforms and Tesla. Apple, Amazon, Adobe, Netflix, AMD, and Salesforce are also among the top 25 S&P 500 gainers.
Notably, Apple stock hit a new all-time high and its market cap is now nearing $3 trillion – a feat it reached on the first trading day of 2022.
That said, the rally hasn’t been broad-based and has been largely led by tech stocks and consumer discretionary companies. Optimism towards AI has helped fuel a rally in US tech stock and Nvidia became the latest entrant into the trillion-dollar market cap club.
However, energy is the worst-performing S&P 500 subsector so far and is down in double digits. Falling energy prices have however helped tame inflation and central bankers like Powell have turned relatively less hawkish now.
Financial, healthcare, utilities, and real estate sectors are also in the red while the material sectors are up only in the low single digits.
The returns profile of S&P 500 subsectors would look like an almost mirror image of 2022 where energy was the only sector in the green while tech was the worst-performing sector.
Powell said fiscal policy is not adding to inflation
The expansive fiscal policy during the COVID-19 pandemic helped fuel inflation. Powell however believes that currently, government spending is not adding to inflation.
He said, “I will add, though, without crossing any lines, that the spending during the pandemic was very high and it’s come down — and so we look at the fiscal impulse from the level of spending and it’s really not material. It may even be slightly contraction, but let’s just say it’s flat.”
Powell added, “If you look at where the inflation is in the economy, I wouldn’t say that that’s an important driver of inflation or something that we think about or consider.”
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