Powell speech: Emphasis on progress made so far, market interpretation dovish, BTC trades marginally higher

• The Fed is committed to achieving a policy stance that will bring inflation sustainably down to 2% over time.
• With the fast pace of the tightening, more meaningful tightening could be in the pipeline, driven by new or existing uncertainties.
• Decisions on the extent of additional policy firming and how long the policy will last, remain situation-based.
• Key influencers include the totality of incoming data, evolving outlook, and the balance of risk.

Federal Reserve (Fed) chair Jerome Powell delivered his speech at the Economic Club of New York, indicating that data over recent months has shown growing progress in both of the committee’s mandates – maximum employment and price stability.

His comments were interpreted as mildly dovish and the US Dollar (USD) sold off as a result. Bitcoin, which is negatively correlated to the USD, saw marginal gains, trading a tenth of a percentage point higher, just above $28,600 at the time of writing.  

In his speech, Powell stated that with the Fed setting out to restore price stability in March 2022, the resolve had prompted raising rates as part of a greater goal of unwinding distortions to supply and demand resulting from the Covid-19 pandemic, and restrictive monetary policy. The intervention helped cool strong demand while giving supply time to catch up. These are the two forces, Powell affirmed, that the Fed is using to bring inflation down.

The stance of policy remains restrictive, he added, with tight policy putting downward pressure on economic activity and inflation. Nevertheless, the fast pace of the tightening could still warrant more meaningful tightening to come

Notwithstanding, the Fed is committed to achieving a policy stance that will bring inflation sustainably down to 2% over time. They are also committed to keeping policy restrictive until confidence is achieved that inflation is nearing that objective.

The Fed is keen on recent data showing some economic growth and demand for labor. With this, further progress on inflation could still be at risk, warranting further tightening of policy. 

Conditions include:

• Additional evidence of persistently above trend growth
• That tightness in the labor market is no longer easing

As financial conditions continue to tighten significantly over the months, persistent changes in financial conditions could have implications for the path of monetary policy.

Jerome Powell on bringing inflation down to 2%

The Fed remains resolute to returning inflation to 2% over time, but acknowledging the range of uncertainties (old and new alike) that could complicate its task of balancing the risk of tightening monetary policy too much, against the risk of tightening too little.

For too little, it could allow above target inflation to become entrenched and ultimately require monetary policy to ring more persistent inflation from the economy. Notably, this would be at a high cost to employment. On the other hand, too much would mean unnecessary harm to the economy.

Given uncertainties and risks, and considering how long it has taken, the committee has chosen to proceed carefully. Decisions on the extent of additional policy firming and how long policy will remain will be based on the totality of incoming data, evolving outlook, and the balance of risk.