It was mayhem on the Wall Street after Federal Reserve Chief Jerome Powell signaled the central bank would keep raising interest rates to tame inflation. The U.S. economy will need tight monetary policy “for some time” before inflation is under control, Powell said in a speech to the Jackson Hole central banking conference in Wyoming. That means slower growth, a weaker job market and “some pain” for households and businesses, he added. U.S. stock indexes have retreated since the turn of the year as investors priced in the expectation of aggressive interest rate hikes and a slowing economy. But they have recovered strongly since June, with the S&P 500 recouping nearly half its losses for the year on stronger-than-expected quarterly earnings and hopes inflation has peaked.
Jerome Powell, Chairman of the Board of Governors, Federal Reserve System delivered his remarks on August 26, 2022. Powell said that the Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Currently, it is almost 9%. What that means is that the rate hikes may continue till the inflation numbers slide down. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” said Powell during the Jackson Hole Economic Policy Symposium 2022 speech.
The strong winds of inflation is blowing across nations and central bankers are determined to fight it out. Inflation in the US is already at a four-decade high while UK inflation is expected to cross 18% in 2023. Central bankers including US Fed have been raising interest rates so as to tame inflation but the downside to it is a slowdown in economic growth. This year’s theme of the Jackson Hole Economic Policy Symposium is to explore the emergence of economic constraints during the pandemic and how supply considerations have returned to center stage.
Possible Impact on Indian Market
We feel on Monday the Indian equity markets might show some jitteriness. Indian markets cannot be isolated from the global sentiments. However the amount of fall will be limited. The market was already discounting this hike and was not expecting any reversal in their policy normalisation stance. Powel warned of some pain ahead in the economy. This is an indication that the rate hike in September can be large, even 75 bp in September. FPIs may get swayed initially by the bearish outcome but later come back given its relative resilience and higher growth expectations. Benchmark indices managed to end in the green on Friday as Sensex climbed 59.15 points to end at 58,833.87. Nifty gained 36.45 points to end at 17,558.90.
(Additional Input from PTI)