Powell Downplays Stagflation Fears Amid Slowing Growth and Sticky Inflation

Federal Reserve Chair Jerome Powell downplays stagflation concerns, citing high nominal growth and peak interest rates. Despite slowing GDP growth and high inflation, Powell remains optimistic about the economic outlook, but some Fed officials express concerns about upside risks to inflation.

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Nitish Verma
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Powell Downplays Stagflation Fears Amid Slowing Growth and Sticky Inflation

Powell Downplays Stagflation Fears Amid Slowing Growth and Sticky Inflation

Despite weakening US real GDP growth and persistently high inflation, Federal Reserve Chair Jerome Powell has downplayed concerns about stagflation. Powell cited high nominal growth, peak interest rates, and broadening earnings performance as reasons to remain optimistic about the economic outlook.

Why this matters: The Federal Reserve's stance on inflation and economic growth has a direct impact on the overall health of the US economy, influencing everything from job markets to consumer spending. As the central bank navigates the complex landscape, its decisions will have far-reaching consequences for businesses, investors, and individuals alike.

The US economy grew at a 1.6% annualized rate in the first quarter of 2024, marking a slowdown from the 3.4% growth rate in the previous quarter. Inflation, as measured by the Fed's preferred Personal Consumption Expenditure (PCE) index, rose at a 2.7% annual rate in March, remaining above the central bank's 2% target.

Despite the economic challenges, Powell believes the current conditions are more constructive for equity investors. The S&P 500 index ended Friday up 1.9% for the week, at 5,222.68, just 0.5% off its record close in late March. The benchmark 10-year Treasury yield finished the week roughly unchanged at 4.503%, but off its late April high of 4.706%.

However, some Fed officials have expressed concerns about upside risks to inflation and the need for further rate hikes. Dallas Fed President Lorie Logan stated, "There are important upside risks to inflation that are on my mind and I think there's also uncertainties about how restrictive policy is and whether it's sufficiently restrictive to return inflation to the US central bank's 2% target."

A key survey by the University of Michigan showed a jump in consumers' inflation expectations, which could challenge the Fed's current assessment that expectations are anchored. The survey revealed that year-ahead inflation expectations rose from 3.2% to 3.5% in May, the highest level since November.

The Fed has maintained its benchmark policy rate at a range of 5.25-5.50% since July 2023, following a series of aggressive rate hikes aimed at curbing inflation. While some officials, like Atlanta Fed President Raphael Bostic, believe inflation will slow under the current monetary policy, others, such as Minneapolis Fed President Neel Kashkari, have questioned the restrictiveness of the current policy stance.

As the Federal Reserve continues to navigate the complex economic landscape, balancing price stability and growth remains a key challenge. The upcoming April Consumer Price Index report and retail sales data, set to be released on Wednesday, will provide further insights into the trajectory of inflation and consumer spending. While Powell remains optimistic, the debate among Fed officials highlights the uncertainty surrounding the path to achieving the central bank's inflation target while maintaining economic growth.

Key Takeaways

  • Fed Chair Jerome Powell downplays stagflation concerns despite slowing GDP growth and high inflation.
  • US economy grew 1.6% in Q1 2024, with inflation at 2.7% annual rate in March.
  • Powell cites high nominal growth, peak interest rates, and broadening earnings as reasons for optimism.
  • Fed officials are divided on inflation risks, with some calling for further rate hikes.
  • Upcoming CPI report and retail sales data will provide further insights into inflation and consumer spending.