But this had now all changed and no one at the Fed was “waiting for the old regime to come back.” In reality the pumping of trillions of dollars into the financial system was to boost Wall Street. In the past, the Fed had been able to pursue a monetary policy to support the “economy” confident that inflation would not increase. Powell briefly referred to the policy problems confronting the Fed and other central banks. He said the previous scenario of the Fed that inflation would start to come down by the second half of this year had “fallen apart.” The Fed’s continuous claim through most of last year was that price rises were “transitory.” If inflation continued to rise, “my colleagues and I may well reach the conclusion that we need to go more quickly and if so, will do so.” The sole aim of interest rate increases, as Powell made clear, is to reduce the demand for labour.
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The Fed’s measures, however, will do nothing to bring down the price hikes in oil, gas, food commodities or metals which are now surging, not least because of the activities of speculators who have piled into these markets. Wage increases had to be consistent with the long-term inflation goal of 2 percent and policy makers were “very focused on restoring price stability.” Powell said the Fed was in favour of a “strong labour market” but made clear the key issue was price stability. This is to make up for the cuts in living standards that have already taken place and the further slashing of real wages in the immediate future.
#Powell speech code#
The reference to “longer-term expectations” of higher inflation is a code phrase for the major fear of the Fed and other central banks that workers will push for higher wages. The risk was that an “extended period of high inflation could push longer-term expectations uncomfortably higher,” which underscored the need for the Fed to “move expeditiously.” Under conditions where the latest burst of inflation comes from the flow on effects of the war in the Ukraine, the Fed would not “look through a brief burst of inflation associated with commodity price shocks” but would act. “By many measures, the labour market is extremely tight, significantly tighter than the very strong job market before the pandemic,” he said in his prepared remarks to the NABE conference.
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The Wall Street Journal noted that Powell’s remarks struck a “tougher tone” than he had used at his press conference just days earlier when the Fed announced a 0.25 percentage point rise. “If we think it’s appropriate to raise by 50 basis points at a meeting or meetings, we will do so,” he said. In the question-and-answer session, he was asked what would prevent the Fed lifting its base interest rate by 0.5 percentage points (50 basis points) at its next meeting in May. Powell began his remarks to the NABE conference by emphasising that the “labour market is very strong, and inflation is much too high.” It was necessary to return monetary policy to a more neutral level “and then to move to more restrictive levels if that is what is required to restore price stability.”
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The example of former Fed chair Paul Volcker in the 1980s, who pushed interest rates to a record high, creating a deep recession and driving down wage demands amid rampant inflation, was one to be followed. In remarks to a Senate committee earlier this month, Powell left no doubt about what he was prepared to do if necessary. In other words, while workers are having their real wages cut, daily in some cases as prices climb, the Fed’s stated policy is to deepen this process by reducing the demand for labour through its monetary policy. Federal Reserve Board chairman Jerome Powell testifies before Congress on Tuesday, June 22, 2021.