Jerome Powell, the 16th chair of the United States Federal Reserve, said in a recent statement that sky-high inflation might become permanent. This is in sharp contrast, a full 180 degree pivot, to the statement that he gave a year ago claiming that inflation would be transitory.
Despite multiple interest rate hikes, the US economy has been facing strong inflation that refuses to die down. On the other side of the world this issue has been resonating across several economies including Europe, Canada, and other developing economies. Recently we saw Bitcoin (BTC) turn volatile when it was announced that inflation hit a 40-year high in the US.
What Will Powell Do Next?
On Wednesday, Powell stated that it is imperative to keep inflation at healthy levels or things might get out of hand.
“There’s a clock running here, where we have high inflation running now for more than a year and it would be bad risk management to just assume that those longer-term inflation expectations will remain anchored,” Powell said at a European Central Bank forum on monetary policy.
Powell further added that the global economy is “driven by very different forces” and the disinflationary pressures of past decades might be gone for good.
“I think we now understand better how little we understand on inflation,” Powell said. We’ve now come full circle on predictions made by Powell and others about inflation, and they were completely wrong.
Loss of Credibility at the FED
Failing to predict macro trends like sky-high inflation could make investors question the credibility of the FED going forward. For instance, should investors believe that we will have the “soft landing” that Powell predicted after raising interest rates? Should they believe that if they break something in the credit markets that they have the tools to fix it? That is more faith in these institutions than some are willing to accept.
