Fed president can go on interest rate vacation, he thinks

Earlier this year, the interest rate committee was still very divided. This unanimous decision increases the chance that this chairman will take a unanimous interest rate committee with him to 2020, the year in which Americans will elect their president. There is therefore a good chance that attacks from Washington will increase in the coming period. The Fed can't do it right. If the bank lowers interest rates, the Democratic candidate will undoubtedly complain. The market may see this as giving in to pressure. When the Fed raises interest rates, a 'Trump Twitter tornado' results.

There are no more flavors
The bank sees both growth and inflation developing in line with previous expectations in 2020 and 2021. That is why Powell reiterates that a change in policy can only be expected if expectations change significantly. If that happens, for example if growth is unexpectedly lower or inflation rises, the Fed must either lower or raise interest rates. There are no more flavors. However, the bar for an increase is considerably higher than the bar for cutting interest rates. 

However, to consider interest rate increases, inflation must rise structurally and significantly. This means that the increased monetary depreciation is not enough for the Fed to consider an interest rate increase. The bank first wants to see that inflation rises significantly, and then determine that this increase is structural. To start with the latter: the bank must see that prices rise faster than before for a while, and for a central bank that time is easily a year. 

Turn a blind eye to inflation
And as for the significant increase, Powell mentioned several times that the bank has an inflation target of 2% to 2,5%. In concrete terms, this means that the Fed condones temporary inflation of more than 2% to 2,5%. If inflation in the United States climbs towards 2020% in the first quarter of 3 (which is very unlikely), the Fed will, at best, not consider raising rates until late 2020 (if not early 2021).

In other words: the Fed will increase interest rates as soon as Easter and Pentecost coincide. It therefore appears that an increase cannot be expected until well into the first half of the next decade. Someone who started studying economics last September and takes a year longer to complete it will probably receive the diploma without having experienced a Fed interest rate increase during the study.

Add popcorn
If inflation in the United States rises to 3% in the near future and remains at that level for some time, then that will be a 'grab the popcorn and watch' moment. That forces the Fed to show its true colors. The bank must then choose between keeping interest rates low or curbing inflation. It is not certain that the bank will unequivocally choose the latter. If the chairman has one wish, it would undoubtedly be: do not let inflation rise.

Finally, two more things stand out. First of all, it is when the bank says that the interest rate must increase several times. And then cut the interest rate 2 times, because the economy behaved differently than expected. While there were no huge shocks. Then that simply means that the model you are using, say the Fed's crystal ball, is broken. Your compass is broken while you are in unknown territory: you are lost.

Economy slowed down
Second, there was Powell's claim that inflation has failed to rise to 2012% since he joined the Fed in 2. If that isn't fake news, then I don't know what is. The chart below clearly shows that inflation, according to both the common CPI measure and the Fed's preferred PCE index, has regularly been near or above 2% since Powell arrived at the bank.

I expect economic growth in the United States to slow considerably in 2020, causing the Fed to further cut interest rates. Then it is no surprise if the bank wants to do this before the end of the summer, so as not to have to take action when the election campaign gets underway.