The Federal Reserve is putting a pause on interest rates in September, potentially leaving room for one last hike in 2023. Yahoo Finance Fed Reporter Jennifer Schonberger breaks down Fed Chair Jerome Powell’s statements on data dependency while carefully considering the next monetary policy steps to tame inflation to the 2% goal. For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
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Fed’s Powell Proceeding ‘Carefully’ on Monetary Policy, Inflation

The United States Federal Reserve Chairman, Jerome Powell, has recently emphasized the central bank’s cautious approach to setting monetary policy amidst concerns of rising inflation. Powell stressed the importance of carefully assessing the economic landscape before making any drastic decisions that could potentially disrupt the fragile recovery from the pandemic-induced recession.

Powell’s deliberate stance should not come as a surprise, given that the Federal Reserve is tasked with maintaining price stability and maximum employment. With inflation rates climbing to levels not seen in years, there is a fine balance that needs to be struck between supporting economic growth and preventing overheating that could lead to spiraling price increases.

In his recent remarks, Powell acknowledged that inflation had risen notably but portrayed it as expected and temporary. He attributed the recent jump in prices to various factors, including supply chain disruptions and the reopening of the economy. The Chairman reiterated that the Federal Reserve has the tools to address inflation if needed, but it remains crucial to avoid premature tightening that could hinder the ongoing recovery.

The central bank currently follows a flexible average inflation targeting strategy, which allows for a moderate overshoot of the 2% target to compensate for periods of undershooting. This approach provides the Federal Reserve with greater flexibility to accommodate inflation without immediately resorting to interest rate hikes.

Powell’s cautious approach is further supported by the fact that the labor market has not fully healed from the pandemic’s impact. While significant progress has been made in employment, millions of Americans are still unemployed, and the participation rate remains below pre-pandemic levels. A full recovery in the job market is necessary before tightening monetary policy to prevent any setbacks.

Furthermore, Powell highlighted the importance of reaching out to different communities to ensure a more inclusive recovery. Minority and low-income workers have been disproportionately affected by the pandemic, and it is crucial for the Federal Reserve to consider their needs while making policy decisions.

Critics argue that the Federal Reserve’s ultra-loose monetary policy, characterized by near-zero interest rates and massive asset purchases, could fuel inflationary pressures. They express concerns that the central bank may be underestimating the risks of rising prices and delaying necessary actions. However, Powell’s cautious approach aims to strike a balance, considering the long-term implications of policy decisions to support a sustained and inclusive economic recovery.

Moving forward, the Federal Reserve will closely monitor economic data to assess the trajectory of inflation and the progress in the labor market. The central bank will be flexible and ready to adjust its stance if necessary. Powell’s commitment to proceed carefully in adjusting monetary policy reflects the Fed’s responsibility to steer the economy towards a stable, sustainable, and equitable path.