Federal Reserve Chair Jerome Powell stated on Wednesday that the unique circumstances resulting from the Covid pandemic have aided the central bank’s efforts to tackle inflation without instigating a recession. This achievement is considered a rare feat in economic history.
In its latest economic projections, the Federal Reserve suggested that it would reduce interest rates in 2024, despite the ongoing growth of the economy. This potential approach could be a means of achieving the much-discussed “soft landing,” which many economists were initially skeptical about when the central bank began aggressively raising rates last year to combat post-pandemic inflation.
Powell explained during a press conference following the Fed’s final meeting of the year that the inflation experienced was distinct from the traditional demand-driven kind. He attributed it to a combination of robust demand, along with exceptional supply-side limitations affecting both goods and labor due to a labor force participation shock.
The Fed has adopted a two-pronged strategy in its fight against inflation, focusing on weakening demand in the economy while allowing the “vertical” supply chain to normalize. Powell noted that various sectors of the economy now show signs of nearing their pre-pandemic levels on the supply side.
Powell expressed caution regarding the future as the supply side assistance begins to diminish. He acknowledged the possibility that once the supply side support wanes, the focus will shift to demand, which could present greater challenges. However, he refrained from making definitive statements about the uncertainty surrounding the final phase of the process.
While Powell mentioned that the current situation has been favorable so far, he acknowledged that future circumstances may prove more difficult. The description of the economy provided by Powell aligns with his previous statements throughout 2021, where he often referred to the rapid price increases as “transitory.” However, given the acceleration of inflation, the central bankers dropped this language and began aggressively raising rates in March 2022. Since then, the benchmark rate has been increased by more than 5 percentage points.
Source (CNBC)
