A review of the speech from Fed Powell by topics

<p>Decline in Inflation So Far: (A review)</p><ol><li><p>Origins and Initial Actions:</p><ul><li>High inflation resulted from strong demand meeting pandemic-limited supply.</li><li>The Federal Open Market Committee raised the policy rate in March 2022 to address inflation.</li><li>The goal was to slow demand growth, allowing supply to catch up.</li></ul></li><li><p>Headline PCE Inflation:</p><ul><li>Peaked at 7% in June 2022, then declined to 3.3% by July 2022.</li><li>Global events, like Russia's war against Ukraine, influenced these changes.</li><li>Headline inflation reflects the direct experience of households and businesses.</li></ul></li><li><p>Core PCE Inflation:</p><ul><li>Excludes volatile food and energy prices.</li><li>Peaked at 5.4% in February 2022, then decreased to 4.3% by July.</li><li>Two months of positive data is just the start; more is needed to ensure sustainable decline.</li><li>The goal is to achieve price stability.</li></ul></li><li><p>Core Goods Inflation:</p><ul><li>Has seen a significant decline, especially for durable goods.</li><li>The motor vehicle sector exemplifies this trend, with prices spiking during the pandemic due to demand-supply imbalances.</li><li>As the pandemic's effects lessen, supply improves, and demand decreases due to higher interest rates.</li><li>Restrictive monetary policy is essential for continued progress.</li></ul></li><li><p>Housing Sector Inflation:</p><ul><li>Interest rates greatly influence this sector.</li><li>Mortgage rates doubled in 2022, leading to decreased housing starts, sales, and house price growth.</li><li>Growth in market rents began to decline.</li><li>Measured housing services inflation, reflecting all rents, has started to decrease but lags behind market changes.</li></ul></li><li><p>Nonhousing Services Inflation:</p><ul><li>Makes up over half of the core PCE index.</li><li>Includes services like health care, food services, and transportation.</li><li>Inflation in this sector remained stable since liftoff but has shown a decline over the past three to six months.</li><li>This sector is less affected by global supply chain issues and is less sensitive to interest changes.</li><li>The labor-intensive nature of these services and a tight labor market have influenced inflation here.</li><li>Restrictive monetary policy will be crucial for balancing supply and demand, reducing inflation in this sector.</li></ul></li></ol><p>Outlook: (A look ahead)</p><ol><li><p>General Perspective:</p><ul><li>The unwinding of pandemic-related distortions will continue to reduce inflation, but restrictive monetary policy will play a significant role.</li><li>Achieving a 2% inflation rate will likely need a period of economic growth below the trend and some relaxation in labor market conditions.</li></ul></li><li><p>Economic Growth:</p><ul><li>Restrictive monetary policy has led to tighter financial conditions, pointing to growth below the trend.</li><li>Real yields have increased, bank lending standards have become stricter, and loan growth has decelerated.</li><li>Indicators like slowed industrial production growth and reduced residential investment expenditure suggest a slowing economy.</li><li>However, there are signs that the economy might not be cooling as anticipated, with GDP growth exceeding expectations and consumer spending being particularly strong.</li><li>A resurgence in the housing sector and consistent above-trend growth might necessitate further monetary policy tightening.</li></ul></li><li><p>The Labor Market:</p><ul><li>The labor market has been rebalancing over the past year, but the process isn't complete.</li><li>Labor supply has improved due to increased participation from workers aged 25-54 and a return to pre-pandemic immigration levels.</li><li>The labor force participation rate for prime-aged women reached a record high in June.</li><li>Although job openings remain high, they are decreasing, and payroll job growth has significantly slowed.</li><li>Total hours worked have remained stable, and the average workweek has returned to pre-pandemic levels, indicating a normalization in labor market conditions.</li><li>Wage pressures have reduced, with wage growth slowing across various measures. However, real wage growth has been on the rise as inflation decreases.</li><li>The expectation is for the labor market rebalancing to persist. If labor market tightness doesn't ease, it might necessitate a monetary policy intervention.</li></ul></li></ol><p>Uncertainty and Risk Management along the Path Forward: (the Challenges)</p><ol><li><p>Inflation Target Commitment:</p><ul><li>The inflation target is set at 2%.</li><li>The goal is to establish a monetary policy that is restrictive enough to reduce inflation to this target over time.</li><li>Determining when this stance is achieved in real-time is challenging.</li></ul></li><li><p>Real Interest Rates and Policy Stance:</p><ul><li>Real interest rates are currently positive and exceed mainstream estimates of the neutral policy rate.</li><li>The current policy is seen as restrictive, exerting downward pressure on economic activity, hiring, and inflation.</li><li>The exact neutral rate of interest is uncertain, leading to ambiguity about the precise level of monetary policy restraint.</li></ul></li><li><p>Lags in Monetary Tightening Effects:</p><ul><li>The effects of monetary tightening on economic activity and inflation are delayed.</li><li>Over the past year, the policy rate has been raised by 300 basis points, with a 100 basis point increase in the last seven months.</li><li>The size of securities holdings has also been significantly reduced.</li><li>The varied estimates of these delays suggest potential further impacts.</li></ul></li><li><p>Supply and Demand Dislocations:</p><ul><li>This cycle's unique supply and demand imbalances complicate the effects on inflation and labor market dynamics.</li><li>Job openings have decreased without a corresponding rise in unemployment, indicating a significant demand for labor.</li><li>Inflation appears to be more sensitive to labor market tightness than in recent decades.</li><li>It's uncertain whether these dynamics will continue, emphasizing the need for flexible policymaking.</li></ul></li><li><p>Balancing Risks:</p><ul><li>Policymakers face the challenge of weighing the risk of over-tightening monetary policy against under-tightening.</li><li>Insufficient tightening could lead to persistent above-target inflation, necessitating more aggressive measures that could harm employment.</li><li>Over-tightening could also damage the economy unnecessarily.</li></ul></li></ol><p>There has not been a great move in Fed pricing. However, there is a dovish response to the speech despite the Fed Chairs insistence that the inflation still needs to come down and the economy remains strong with GDP.</p>

This article was written by Greg Michalowski at www.forexlive.com.