Fed chair Powell’s dilemma but his smartest move so far

Fed Chair Jay Powell’s comments on Wednesday have been considered a brilliant communications finesse. Powell was sitting between two chairs. On the one hand, inflation is still too high and Powell repeatedly declared that the Fed will keep raising rates to the so-called terminal rate and that this terminal rate has not been reached yet. On the other hand, there’s an ongoing banking and liquidity crisis that has spread globally.

Therefore Powell had to decide between raising rates to fight inflation or pause rate hikes to fight the banking crisis. Powell chose to continue to fight inflation.

But Powell made a smart move by declaring that the Fed was well aware of the stress in the banking system and he reassured the public by saying, that all depositors’ savings are safe and the Fed staff were going to “work to prevent episodes like this from happening again.”

That was probably the best Powell could do in this situastion.

Sven Franssen