Powell’s Comments Spark Negative Market Reaction

The Chairman of the United States Federal Reserve, Jerome Powell, expects a rise in inflation in the U.S. in the coming period, but ruled out that it will impose enough pressure to raise interest rates.

“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said in a Wall Street Journal conference on Thursday.

“That could create some upward pressure on prices.”

“There’s good reason to think that the outlook is becoming more positive at the margins.”

Raising interest rates would require a strong economic recovery that sees a return to full employment and inflation reaching a sustainable level above 2%, he indicated.

In case the economy witnesses transitory increases in inflation, Powell noted that he expects that American policymakers will be patient. Powell does not expect this to happen in 2021.

Once again, the Fed Chair noted that he is very mindful about the inflation situation, noting that the situation is very different compared with what happened in the 1970s.

“We’re very mindful and I think it’s a constructive thing for people to point out potential risks. I always want to hear that. But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

“Today we’re still a long way from our goals of maximum employment and inflation averaging 2% over time,” Powell was quoted as saying by the Wall Street Journal.

When asked if full employment could be achieves this year, Powell said, “no, I think that’s highly unlikely.”

“I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals.”

Powell noted that the Fed is not focusing on a single policy and is reviewing a wide array of options, but noted that the Fed plans to maintain the low interest rates and the current pace of asset purchases until its goals are achieves.

The market reacted negatively to Powell’s comments, with Treasury yields rising and the stock market falling.

The Dow Jones Industrial Average is down by 1.3%, while the S&P 500 declined by 1.46%, and Nasdaq extended its losses to 2.18%.

The market reaction has been attributed to the lack of more details on how the Fed will be dealing with the situation, as Powell’s remarks was merely a repeat of the message that he and many Fed board member have recently carried to the general public.