There he is again, the Jay Powell that Wall Street has come to appreciate so much over the past few years. At the press conference on Wednesday, the head of the US Federal Reserve (Fed) once again unleashed price fireworks. As planned, he raised the key interest rate by 0.5 percentage points. But overall, Powell has been less aggressive on anti-inflation than many had expected.
The balance sheet total is being reduced more slowly than initially feared. He also ruled out an interest rate step of 0.75 percentage points for the time being. For the stock markets, these were welcome signals of relief. It was the best day on the NYSE since May 2020 – the Nasdaq technology exchange, which has recently come under heavy pressure, rose by more than three percent. Powell, the friend of the markets, is back.
Sure, the Fed chair doesn’t want to cause too much turmoil. The last time interest rates were raised by half a percentage point was 22 years ago. Rate steps of 0.25 percentage points are common. And even if the balance sheet total is being reduced more slowly than initially assumed, the planned reduction of $95 billion per month is the largest in the history of the US Federal Reserve.
There are also concerns that Powell will go too far in controlling inflation and send the country into recession — something that has happened time and time again in the past.
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And yet the Fed chair sent the wrong signals with his market-friendly stance. Since January, Powell has actually been trying to complete his image change. From the supporter of the financial markets, a monetary policy dove, to the hawk, a fierce inflation fighter. Now the Fed is in a zigzag course. “Two steps forward, one step back,” said Michael Feroli, chief economist at America’s largest bank JP Morgan Chase, commenting on the Fed chairman’s strategy.
Because the basic problem hasn’t really changed. “Inflation is way too high,” Powell admitted on Wednesday. And with an inflation rate of 8.5 percent recently, a central bank is needed that stays on course, even if the mood on the markets is shaky. The war in Ukraine and the lockdowns in China are also putting pressure on prices. There is still a long way to go before the targeted rate of inflation of two percent.
This will not go unnoticed by investors either. And soon the good mood could change again. As is well known, Powell is late with the fight against inflation. And if investors feel like he’s not doing enough about it, they’ll be quick to wish Powell the Hawk back.
More: The head of the Fed is raising interest rates significantly, but is acting less aggressively than feared. The markets react with significant price gains.