Jul 31, 2019

How Jerome Powell's tone on inflation has changed

Data: Axios analysis of Powell's speeches and interviews; Graphic: Andrew Witherspoon/Axios

Fed chairman Jerome Powell has spoken a lot about the risk of inflation overshooting its 2% target, but only recently has he discussed the risk of a persistent undershoot.

Why it matters: This "reinforces a generational change in Fed thinking from fear-of- inflation-too-high to fear-of-inflation-too-low," as Tony Dwyer, chief market strategist at Canaccord Genuity, said in a tweet.

Between the lines: Under usual circumstances, the Fed's two mandates work against each other: Maximizing employment usually is cover for the Fed to cut rates, while the price stability mandate has been used to justify rate hikes.

  • Over the last several years, the Fed has been raising rates despite inflation falling below target. Yellen made the case that the Fed could raise rates "more slowly," should weak inflation persist.
  • It's not that the Fed couldn't have made the case for a cut based on soft inflation readings — they just didn't. That's much easier now that interest rates have come up from 0%.

Go deeper

Why the Fed wants higher inflation

Illustration: Rebecca Zisser/Axios

Low inflation may sound good to consumers, who like what it suggests about the prices they'll pay. But the Federal Reserve — which will likely cite the lack of meaningful price increases as a motive for cutting interest rates today — has reasons for concern.

Why it matters: Inflation has come in below the Fed's "sweet spot" — 2% inflation — throughout much of the record-long economic expansion, and consumers have benefited from low prices accompanied by low borrowing costs. But Fed chair Jerome Powell has pivoted to warn of the dangers of weak inflation — a shift from the more common fear of rising inflation, like the type of soaring prices seen in the late 1970s and early '80s.

Go deeperArrowJul 31, 2019

Fed cuts interest rates for the first time since 2008

Federal Reserve Chairman Jerome Powell speaks at a press conference in June. Photo: Ting Shen/Xinhua via Getty Images

In its biggest decision since 2015, the Federal Reserve said on Wednesday it would slash its benchmark interest rate by a quarter point, as expected, in an effort to extend the economic boom and boost weak inflation.

Between the lines: Speaking to reporters at a press conference following the decision, Fed Chair Jerome Powell re-adjusted the market‘s expectations of a series of more rate cuts by the end of the year. Stocks dropped sharply during the press conference, but after regaining some ground, the Dow finished down more than 300 points, while the S&P fell 1.19% and the Nasdaq dropped 1.1%.

Go deeperArrowJul 31, 2019

Jay Powell's constraints

Illustration: Sarah Grillo/Axios

Jay Powell did his best impression this week of a Fed chair making his own data-driven decisions about where he should set short-term interest rates. The reality, however, is that the markets and the president are giving him very little choice.

Driving the news: Powell cut interest rates on Wednesday — the first time the Fed has done so in over a decade. In doing so, he effectively fulfilled a prophecy that the fixed-income markets (and even the stock market) had been making for all of 2019. They saw the rate cut coming long before the Fed was willing to admit it, and they were right all along.

Go deeperArrowAug 4, 2019