Fed Chairman Powell: Inflation pressures remain, will continue to tighten monetary policy

At the highly anticipated global central bank annual meeting, Fed Chairman Powell delivered a brief and powerful speech, reaffirming the Fed's firm stance against inflation. He emphasized that the primary task at hand is to bring the inflation rate down to the target level of 2% and stated that strong measures will continue to be taken to balance supply and demand, thereby reducing inflationary pressures.

Powell pointed out that although the inflation data in July showed some improvement, it is not enough to change the Fed's interest rate hike path. He stated that the Fed will not be swayed by short-term data, as the current inflation situation remains severe. Although the U.S. economy has slowed from last year's rapid growth, it still shows strong potential, especially as the labor market remains very tight.

Regarding future monetary policy, Powell stated that lowering inflation may require maintaining a restrictive monetary policy for some time. He warned that continuing to raise interest rates could bring some "pain" to the economy, but failing to restore price stability would lead to greater losses. Powell emphasized that the Fed is committed to adjusting its monetary policy stance to sufficiently lower the inflation rate to 2%.

It is worth noting that Powell refuted the market's expectations for interest rate cuts starting in the second half of 2023, as he anticipates that the benchmark rate will be slightly below 4% by the end of next year. This statement suggests that the Fed may maintain high interest rate levels for a longer period.

Powell also emphasized the importance of managing inflation expectations. He pointed out that a current special risk is that the longer high inflation lasts, the more entrenched the public's expectations for continued rising inflation may become. To avoid a repeat of the high inflation scenario of the 1970s, the Fed is taking proactive measures.

Nonetheless, Powell also mentioned that as the monetary policy stance tightens further, it may be appropriate to slow down the pace of interest rate hikes at some point in the future. However, he emphasized that the Fed will remain committed to combating inflation until the job is done.

Powell's speech had a significant impact on the financial markets. Major U.S. stock indices fell sharply, the two-year U.S. Treasury yield rose, the dollar index strengthened, and gold prices declined. The futures market's expectation for a 75 basis point interest rate hike by the Fed in September also rose significantly.

Overall, Powell's speech reaffirmed the Fed's determination to continue tightening monetary policy, while also providing important clues for the market regarding the future direction of policy.