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18 Dec 2024
Powell speech: Premature to make any conclusion on impact of tariffs
Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 25 basis points to the range of 4.25%-4.5% after the December meeting and responds to questions in the post-meeting press conference.
Key quotes
"Committee is discussing ways in which tariffs can drive inflation, we've done a good bit of work on that."
"That puts us in place to make a careful assessment of appropriate policy response to tariffs."
"There are many factors for how much tariffs will even go into consumer inflation."
"Premature to make any conclusion on impact of tariffs, don't know what countries, what size, how long."
"Don't know that 2018 is much of a guide to what will happen this time."
"We are at the stage of thinking through questions, not getting to definitive answers for some time."
"Core inflation coming down to 2.5% next year, as in projections, would be significant progress."
"We also have to think about the labor market, mindful it is gradually cooling."
"We expect significant policy changes, we need to see what they are and the effects to get a clearer picture."
"We will be looking for further progress on inflation to make those cuts."
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.