Powell’s Powerful Words
On Friday, the annual Economic Symposium took place at Jackson Hole where Federal Reserve Chairman, Jerome Powell, was the keynote speaker. As the top officials from the world’s biggest central banks convened, Powell declared statements that most people would not want to hear. It is looking like the central banks are implementing higher interest rates. Even though this will “bring some pain to households and businesses”, it is necessary to help fight inflation. Powell, and many other Federal officials highlighted the fact that over the next year, they expect rates to rise and hold for a period of time. In fact, federal-fund futures, used by traders to place wagers on interest rates, suggest a 75% chance Central Banks will raise interest rates by 75 points.
However, a paper released written by economists Franceso Bianchi and Leonardo Melosi suggests that this could actually make matters worse. They believe that if there are no fiscal constraints on spending, then the higher interest rates will make the cost of debt more expensive and drive inflation even higher. As a result of the speech, markets did not react so positively. Major indices such as the DOW and S&P 500 fell, as higher rates are synonymous with economic pain. Bitcoin even dipped below $20,000. One thing we do know is that many economists and officials want to stop inflation now because it will be worse trying to combat it later. Closing out, Powell said that the Fed is trying their best to avoid surging government spending with higher interest rates that couldn’t be sustained and led to years of stagflation. This was similar to what happened in the 60s and 70s, which resulted in slow growth and rising inflation. On that note, start saving because it might be a rough year!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.