Powell: 'Inflation is temporary'... Maintaining 'two rate cuts' this year

Recent US Inflation Expected to 'Persist Short-Term and Then Decline'

Benchmark Rate Held at 4.25~4.5%, Year-End Forecast Also Maintained at 3.9%

Stagflation Concerns Detected Within the Fed

Jerome Powell, Chairman of the US Federal Reserve (Fed), indicated on the 19th (local time) after the March Federal Open Market Committee (FOMC) decision to hold rates steady, that while there is clearly an inflation impact from tariffs, it is expected to be temporary. He emphasized that the economic policies centered around tariffs have uncertain impacts on the economy, and thus, the Fed will decide on future monetary policies while observing the situation.

However, within the Fed, there is a sense of unease as the US economic growth rate is slowing and upward inflationary pressure is increasing.

"No Need to Rush Additional Adjustments"

Chairman Powell acknowledged the possibility of inflation due to tariffs but remained cautious about adjusting monetary policy. He interpreted the recent rekindling of inflation to 3% in February as a temporary phenomenon.

He stated, "Some of the inflation is clearly from tariffs," but also noted, "If inflation persists short-term and naturally declines, we can observe without policy intervention." For now, the plan is to watch the situation and decide on future actions.

Accordingly, in the economic outlook forecast (SEP) released quarterly, the Fed predicted the year-end benchmark rate (median) to be 3.9%, maintaining the forecast from December last year. According to this forecast, the Fed will cut rates by 0.25% points twice by the end of the year.

Chairman Powell cited the recent survey showing that while short-term inflation expectations have risen, long-term inflation expectations remain stable as the basis for his confidence that inflation will soon stabilize.

Internal Stagflation Concerns

During the press conference, when Chairman Powell emphasized that inflation is temporary, a question arose about the risk of repeating the mistake of losing control over inflation in 2022. Chairman Powell reiterated, "If inflation naturally declines, there is no need to implement additional tightening policies."

However, a different atmosphere is detected within the Fed from Chairman Powell's remarks. According to the SEP, FOMC members lowered the US GDP growth rate forecast (median) for this year from 2.1% in December last year to 1.7%.

On the other hand, the year-end personal consumption expenditures (PCE) inflation rate forecast was adjusted upward from 2.5% to 2.7%. The year-end core PCE inflation rate forecast, excluding volatile food and energy items, was raised from 2.5% last year to 2.8%. Also, the year-end unemployment rate forecast was slightly raised from 4.3% to 4.4%.

Bank of America analyzed the SEP results, stating, "Given the uncertainty and risk assessment of the (economic) outlook, the Fed's vigilance against stagflation can be seen."

In fact, according to the dot plot, 11 out of 19 FOMC members expected at least two rate cuts this year. This is a decrease from the 15 members who expected at least two cuts in the December economic outlook.

However, Chairman Powell also addressed the possibility of 1970s-style stagflation, stating, "Currently, we are in a situation where inflation is moderating close to 2% while maintaining an unemployment rate near full employment at 4.1%," and "I do not believe we are facing a comparable situation to the 1970s."

Stock Market Cheers

The New York stock market cheered the FOMC results. The Dow Jones index rose 383.32 points (0.92%) to close at 41,964.63. The Standard & Poor's (S&P) 500 index rose 60.63 points (1.08%) to 5,675.29, and the tech-heavy Nasdaq index rose 246.67 points (1.41%) to close at 17,750.79.

Investors particularly positively evaluated the Fed's decision to slow the pace of balance sheet reduction (QT). The Fed decided to reduce the monthly Treasury repayment cap from $25 billion to $5 billion starting in April. The Fed explained, "There is sufficient liquidity in the financial markets, but there are signs of some tightening in the money markets, so this is a measure to alleviate it."

Meanwhile, according to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds rate futures market predicted an 81% probability of holding rates steady at the May FOMC. In June, a 0.25% point cut was expected at 55%.

New York = Park Shin-young Correspondent nyusos@hankyung.com