In contrast to the harsh language Powell has used in recent months, the Fed chairman has used a softer tone in this speech, Mujagic says. “The reduction in steps will probably start as early as this month. Interest rates are still rising, but the steps are getting smaller.’ According to Mujagic, the steps range from 75 to 50 basis points. “So financial markets generally need very little to celebrate.”
In addition to announcing the reduction of interest rate steps, Powell also said he wants to ensure that interest rates go too high. Mujagic: ‘I think it’s a very important statement. A central bank knows that interest rates have to go up when inflation is very high, but a central bank also knows that there is a limit somewhere when too much of a good thing has been done. But we don’t know where that limit is.”
Financial disaster
He continues: “If you cross that line, however, you risk financial disaster. High debts etc. And this not only produces a disaster, but a disaster that no one knows how it will unfold.’
For this he also dares to speak of ‘fear of the unknown’. Mujagic: ‘Powell therefore wants to avoid that error, and therefore concludes that the central bank is effectively forced to choose between two errors. So Powell prefers to raise interest rates too little.’
Turn around
The decision comes from the same man who has drawn historical parallels in recent months and has previously called for not stopping raising interest rates too soon. “But he’s also the man we’ve been saying in recent weeks that he’s going to make a different sound,” Mujagic blurs. And you realize it now. If interest rates were to be raised too much, you would end up in an atmosphere full of unpredictability. But raising too little could cause inflation to stay too high for a long time.
But, he insists, inflation would be a known enemy to central bankers. “Central bankers know how to handle it,” she continues. “But if you raise interest rates too little, then you keep the door open for inflation, so it doesn’t drop to two percent quickly.” That’s what he’s saying, and that means we really need to factor in inflation that’s a little too high for the next few years, rather than what we’re used to.’