tiprankstipranks
The Fed Changes Its Tone on Inflation
Stock Analysis & Ideas

The Fed Changes Its Tone on Inflation

The Fed Chair Jerome H. Powell is changing his tone on inflation.

In a speech at the Bank of International Settlements conference on Friday, he said that inflation would likely last into next year. That’s a shift from his position in the last nine months that inflation is “transitory,” without providing a time frame for what that means.

Nonetheless, Powell is sticking with the theory that supply-side bottlenecks cause inflation. Therefore, it will ease as soon as these bottlenecks ease and the supply catches up with demand.

The Fed is also sticking with its plan to begin the tapering of its bond-buying program, as announced in the last FOMC meeting, and to the view that tapering isn’t the same as tightening, the raising of short-term interest rates.

“It is time to taper, not to raise rates,” Powell said.

Markets React

Financial markets had a mixed response in the Fed’s changing its inflation tone, with equities heading south, as Treasury bonds rallied.

Powell’s comments come when several consumer staples companies, like P&G (PG) and Unilever (UL), have been reporting price hikes, indicating that inflation is here to stay.

To make matters worse, a host of economic reports released in recent weeks suggest that the U.S. economy displays signs of both slowing economic growth, and elevated prices.

The September payroll report, released at the beginning of October, showed that the U.S. economy is creating new jobs at an anemic pace. Meanwhile, three measures of inflation posted last week showed that inflation is running around 5%, well above the Federal Reserve targets.

Then there are two reports early this week, which show that industrial production slowed down in September, as capacity utilization declined.

The Fed’s Beige book, released Wednesday, showed that the U.S. economy is growing at a moderate and modest pace, as prices around the country remain elevated.

Simply put, the U.S. economy may be heading to stagflation, a situation of low economic growth combined with elevated prices.

That’s a far more complex problem for the Fed, as the central bank must deal with two policy targets rather than one.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles