Fed: Powell and inflation rhetoric



If we look at the content of the speech previously published on the Fed’s site; Similar to the FOMC statement, we observe that the rhetoric of economic recovery and risk balance continues. The widespread view after the Fed meeting; Powell supported the idea that the Central Bank was ready to begin discussing soon to remove some of the unprecedented stimulus measures that had come into effect during the pandemic.


According to Powell, the economy has steadily improved since the last assessment, and “Disseminated vaccines have joined unprecedented monetary and fiscal policy actions to provide strong support for the recovery. Economic activity and employment indicators continued to strengthen, and real GDP this year appears to be on track to record its fastest rate of growth in decades.” His guidance on inflation is consistent with his previous statements; “Inflation has increased significantly in recent months. But most of these are temporary effects and inflation should return to 2% in the long run”.


The most prominent statement is that the Fed will not raise interest rates early. Since the text of the speech was predetermined, the rhetoric that would occur in the question and answer would be more critical. He also does not see a 1970s type of inflation as possible. The normalization of inflation, which is now close to 5%, will of course be in the organic development of the business, the important thing is how much of it will normalize. Inflation, which was created by the price dynamics of the pandemic and after, was a desired situation when reflationist policies were implemented. But there is no longer the threat of deflation, there is the threat of extremely high inflation. This will also be the main metric as the Fed normalizes policy and attracts liquidity.


While drawing a more optimistic picture of the economy; Powell’s speech is dove, as it highlights the idea of ​​the impermanence of inflation. The market needs to get over some panic in order to disperse the dust cloud formed after the FOMC and to make a healthier evaluation. If the long side of the yield curve starts to shift to the left, we will conclude that inflation anxiety also increases for the longer run. The kurtosis-steepness of the long side can be an important indicator.

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