Federal Reserve Chair’s Speech: Summary and Analysis

On 1 December, Chairman of the Federal Reserve (the Fed) Jerome Powell gave an address speaking about the US economy and the likely path for United States interest rates.

The reaction of markets was notable as bond yields were sent lower and stocks rallied. Some of the key takeaways are summarised below:

• The Fed’s chair stated that US interest rate policy was ‘well’ into restrictive territory, whilst cautioning that core inflation remains above trend, with the Fed still willing to raise rates again ‘if appropriate to do so’.
• All future rate decisions will be based ‘in totality’ on economic data and the ‘balance of risks’.
• The full effects of previous rate hikes are still having a lagged impact on economic conditions and are likely to have ‘not yet been felt’.
• According to Nobel Laureate Milton Friedman, ‘monetary changes have their effect only after a considerable lag and over a long period’ and that this lag is ‘rather variable’. He noted that the lagged effect on the economy can vary from 4 to 29 months.
• Last week, US inflation and labour data pointed to a cooling of the economy that may have helped tipped the balance.
• The market took Chair Powell’s remarks to be modestly ‘dovish’, increasing the expectation for an easing of interest rates at upcoming meetings.
• Powell’s comments on moving ‘carefully’ perhaps suggest there will be no rate cut in December.
• Market expectations are now tilted towards a near 50% chance of a 25-basis point (0.25%) reduction in March.
• Markets are also pricing in a 1.25% drop in the Fed policy rate across the course of 2024.
• The gold price reacted positively to the potential easing of restrictive policy, moving around $20 per troy ounce higher.
• The gold price spiked higher again Monday morning, before trailing off, as Asian traders digested news of the drone attacks on commercial vessels in the Red Sea, leading to escalating tensions in the region.

We have a raft of important economic data releases in the coming weeks, including:

• US labour data (unemployment rate and non-farm payrolls) – Friday 8 December
• China inflation rate – Saturday 9 December
• UK unemployment rate – Tuesday 12 December
• US inflation data – Tuesday 12 December
• US Fed interest rate decision – Wednesday 13 December
• UK and EU interest rate decision – Thursday 14 December
• US retail sales – Thursday 14 December
• China industrial production – Friday 15 December

With the gold price around all-time highs, most investors consider this a good time to invest in the precious metal. With The Royal Mint, invest in the UK’s most trusted quality gold bullion bars and coins with world-renowned ranges including The Sovereign and Britannia.

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References:

• Fed Chair Powell calls talk of cutting rates 'premature' and says more hikes could happen (cnbc.com)
• Powell Keeps Rate Hikes on the Table. But He Shifted His Tone in One Subtle Way. - Barron's (barrons.com)
• Jerome Powell event: Live coverage of Fed chief's remarks after big slide in bond yields (marketwatch.com)
• What Are Long and Variable Lags in Monetary Policy| St. Louis Fed (stlouisfed.org)

The contents of this article, accurate at the time of publishing, are for general information purposes only, and do not constitute investment, pensions, legal, tax or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, pensions, legal, tax and/or accounting advisors.