Powell's speech, whose second term nomination will be held today at the Senate Banking Committee, was published on the Federal Reserve website. While Powell said the central bank would prevent high inflation from settling in, he warned that the post-pandemic economy could look different from previous expansion. Highlights of Powell's speech;

 

·        We know that high inflation comes at a price, especially for those who cannot afford higher basic costs such as food, shelter and transportation. We are strongly committed to meeting our legal goals. We will use our tools to support the economy and a strong labor market and prevent higher inflation from settling.

·        We may begin to see that the post-pandemic economy may be different in some respects. In pursuit of our goals, we will need to take these differences into account.

·        We worked to improve the public's access to instant payments, intensified our efforts to focus and monitor emerging threats such as climate change and cyberattacks, and expanded our analysis and monitoring of financial stability.

 

It does not reveal much different facts as it is a speech in which high inflation risks are kept at the forefront, together with the emphasis on the strength of the labor market. Due to Omicron, we can still be a little cautious about economic recovery and employment, on the other hand, minimal risks will not be an obstacle for the Fed to increase interest rates, given the imbalances caused by inflation. If the economy is to be supported by a higher balance sheet outlook than before the pandemic, we will not evaluate the marginal impact of rate hikes from a hard landing perspective. Because the real tightening; interest increase + balance sheet intervention.

 

In an environment where the results of the schedule to protect the economy from the coronavirus are followed, it is necessary to adapt to the changing dynamics in order to be protected from the aftershocks. The changing dynamic here is the high supply-driven inflation. The Fed wants to avoid the spiraling effect of this. As we experience the highest inflation in a generation, it is understandable to end stimulus as soon as possible to avoid hot effects. Rooting price pressures is a serious concern because inflation also affects consumer and pricing behavior.

 

As Covid-19 spread in early 2020, the Powell administration had rapidly lowered interest rates towards zero in March. With the high liquidity provided to the market with the beginning of the quantitative expansion, it was desired to both alleviate the panic effect and to maintain the credit flow to the companies with the reduced money cost. After the worst effects of the closure were over, sectoral openings were reinforced with liquidity abundance and financial incentives. The abundance of financial liquidity has an important place in terms of keeping the sectors operating with credits attractive and working. The Fed, of course, does not want to cause a hard landing. Therefore, the effect of increasing credit costs on financial tightening and cutting support needs to be closely monitored.

 

Fed's current December dot chart... Source: Bloomberg, Federal Reserve

 

The unemployment rate fell to 3.9% in the headlines as of December, pointing to tightening business conditions. The Fed is careful to increase the rates in a way that does not reduce the recovery, so it is necessary to pay attention to its actions on the balance sheet at the next stage, rather than interest rate increases that will not make sense on their own. The rate increase is turning into a consensus, which we can understand from the increase in the number of members who want to increase the rates compared to September. An immediate rate hike in March would allow the Fed to raise rates more than 3 times a year within a symmetrical area.

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