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In recent years, the trajectory of inflation in the U.S. economy has been under scrutiny. The Federal Reserve System (FRB) has begun exploring the possibility of ending the tightening cycle in response to the deceleration of inflation. However, the inflation rate continues to surpass the target of 2%, leaving a lingering sense of uncertainty in the economy. This article focuses on the background of this trend, FRB’s responses, the gap between market expectations and FRB’s stance, and the potential future direction of policies.
Background of Inflation Deceleration and FRB’s Policy Shift
Looking at economic indicators, the Personal Consumption Expenditures (PCE) price index, closely monitored by the FRB, showed a 3.0% year-on-year increase. While this figure surpasses the 2% target, it has significantly decreased from the peak of 7.1% in June of the previous year, reaching its lowest level in 2 years and 7 months as of March 2021. Within the FRB, there is optimism that this downward trend is heading towards the 2% target, indicating an expected recovery in price stability.
Despite signs of economic slowdown and changes in employment conditions, the economy continues to maintain resilience. According to Bowman, FRB’s official, robust consumer spending is seen as a factor that “continues to bring inflation pressure,” and discussions about the risk of inflation resurgence persist. In this context, the FRB is carefully considering policies, balancing the decline in inflation rates with the economic slowdown.
Comments from Chair Powell and Market Reactions
A key player in FRB’s policymaking, Chair Powell, emphasized caution in a speech on the 1st, stating that it is “too early” for market speculations about a halt in rate hikes or an early rate cut. However, despite Powell’s comments, there is speculation in the market that the FRB might shift to an early rate cut as early as the meeting in March of the following year.
The divergence between market views and FRB’s stance, as suggested by this mismatch, indicates that market participants harbor doubts and expectations regarding FRB’s actions. Powell’s comments had a limited impact on the market, and disparities persist between market predictions and the FRB’s policies. The impact of this on future monetary policies is a subject of keen interest.
Risks of Inflation Resurgence and Examination of Economic Indicators
The FRB is particularly concerned about the risk of inflation resurgence. The robust nature of personal consumption and other factors pose the potential for inflation, with officials like Bowman expressing persistent caution. The strength in personal consumption expenditure has led to concerns about the resurgence of inflation. However, despite signs of economic and employment slowdown, the phenomenon of sustained resilience continues.
In this situation, the FRB needs to carefully examine economic indicators and formulate appropriate responses. In the midst of uncertainty about the future of inflation and the economy, FRB policies should be progressed while balancing these factors.
Powell’s Emphasis and Consideration of Financial Tightening
Powell emphasizes the necessity for cautious action, stating, “The correct action is to move carefully and think carefully.” Particularly regarding financial tightening, Powell mentioned, “Whether we have done enough or more is needed will be indicated by the indicators,” leaving room for consideration of additional financial tightening.
The FRB continues to demonstrate a stance of carefully adjusting policies while monitoring economic trends. The adjustment of monetary policies by the FRB is expected to be appropriately calibrated based on the direction the economy takes.
Economic Uncertainty and Exploration of Countermeasures
Lastly, in the midst of uncertainty about inflation and economic trends, the FRB is cautiously navigating while exploring appropriate countermeasures. To ensure economic stability, it is necessary to adjust policies flexibly and cautiously, paying attention to market and economic fluctuations.
While adjusting policies in the face of increasing uncertainty is not easy, the FRB continues to prioritize dialogue with the market and adheres to a data-driven approach to achieve economic stability. Observing how the FRB’s responses unfold in light of future economic conditions will be crucial.
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