Powell doctrine:
on raising interest rates
The Chairman of the
U.S. central bank signals a gradualist
approach to raising interest rates
U.S. Federal Reserve Chairman Jerome Powell’s speech last week at the conference for central
bankers in Jackson Hole, Wyoming was a strong defence of the current gradual
approach to raising interest rates. With the American economy growing at a
strong pace, inflation being close to the Fed’s 2% target and
unemployment at a 20-year low, President Donald Trump has been so sharply
critical of this approach of raising interest rates that it has led to
suggestions that he is encroaching on the Fed’s independence. Mr. Trump is
worried that rising interest rates could derail the country’s
economic growth, check the stock market boom, and thereby affect
his own popularity and electoral chances. Mr. Trump, however, has not been the
only one critical of the Fed’s policy. Coming from another perspective, some
are concerned that the Fed may in fact be raising interest rates too slowly,
despite strong signals of an overheating economy. At Jackson Hole, in his first speech
as Fed chief, Mr. Powell sought to defend his gradualism from his critics on
both sides of the divide. He emphasised the imprecise nature of economic
variables such as unemployment and inflation in the modern economy in drawing
attention to the risks of raising rates either too fast or too slow. In
stressing why macroeconomic forecasting is so difficult, Mr. Powell
seemed to suggest that much of monetary policy-making is simply about groping in the dark.
The speech also contained some important hints
about the Fed’s likely policy direction in the coming years. Apart from the
assurance that interest rate hikes will be gradual as before, the Fed Chairman had a
message that has implications for the monetary policy stance of central
banks in emerging market countries. He hinted that “risk factors abroad” could
lead to a change in the Fed’s policy stance in the future. It is probably this
portion of the speech that the markets may perceive as a dovish statement, even though Mr. Powell framed his speech primarily
as a defence of the moderately hawkish policy of gradually raising interest rates.
The Fed’s tightening policy stance has rattled several emerging
markets, most notably Turkey and Brazil, which have seen their currencies tank under selling pressure. The Reserve Bank of India, too, has had
to raise rates twice in the last few months, in part to defend the rupee.
The stock market rallied in response to Mr. Powell’s statement, and the U.S.
dollar, which has strengthened this year, witnessed a fall. It is well-known
that the U.S. central bank has historically been non-committal
when it comes to framing policy with the concerns of emerging markets in mind.
A shift in policy under Mr. Powell would mark a significant change in the Fed’s
outlook towards the rest of the world.
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a Comment
3.
inflation (noun) – an
increase of price level of goods & services & vice versa decrease of
currency value.
4.
encroach (on) (verb)
– intrude, trespass, impinge on (one’s territory).
9. draw attention to
(phrase) – emphasise, highlight, underscore;focus on.
10.
macroeconomic (adjective)
– relating to the branch of economics concerned with large-scale factors
(interest rates/national productivity).
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