US Fed Rates Hike: Jerome Powell’s Take on Elevated Inflation

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US Fed Rates Hike: Jerome Powell’s Take on Elevated Inflation

In a speech at the Jackson Hole Economic Symposium on Friday, August 25, 2023, The Federal Reserve Chair Jerome Powell warned that the central bank is prepared to raise interest rates further in an effort to combat elevated inflation.  

Powell said that inflation is high and that the Fed is committed to returning inflation to the 2% objective. He added that the Fed will proceed carefully in raising rates, but is also prepared to take stronger action if needed. He further added that the Fed is not out of the woods yet on inflation and that it will continue to monitor the situation closely.  

On Friday, the Dow went up by 241 points, which is a 0.7% increase. The S&P 500 also went up, but by a smaller amount of 0.6%. The Nasdaq Composite had the biggest increase, going up by 1%. Looking at the whole week, the Dow decreased by 0.4%, the S&P 500 went up by 0.8%, and the Nasdaq went up by 2.3%.

US Fed Rates Hike: Key takeaways from Jerome Powell's speech

  • Since the US inflation stood at 3.2% in July, higher than the desired level, the Fed is committed to bringing inflation down to its 2% target. 
  • Mentioned the possibility of an increase in interest rates and a prolonged period of higher rates. The current key interest rate is 5.25%, the highest in over two decades, with 11 consecutive rate hikes since early 2022.
  • The Federal Reserve plans to approach policy changes carefully due to factors like the global impact of events like Russia's invasion of Ukraine and continued volatility in food and energy prices. 

US Fed Rates Hike: One-Year Recap

FOMC (Federal Open Market Committee) Meeting DateRate Change (bps)Federal Funds Rate
July 26, 2023+255.25% to 5.50%
May 3, 2023+255.00% to 5.25%
March 22, 2023+254.75% to 5.00%
Feb 1, 2023+254.50% to 4.75%
Dec 14, 2022+504.25% to 4.50%
Nov 2, 2022+753.75% to 4.00%
Sept 21, 2022+753.00% to 3.25%
July 27, 2022+752.25% to 2.50%

US Fed Rates Hike: What lies ahead?

The Fed's actions are likely to have a pivotal impact on the economy. Higher interest rates will make it more expensive to borrow money, which could slow down economic growth. However, it is also possible that higher interest rates will help to cool inflation.  

However, when the US raises its interest rates, it has a negative impact on both the Indian markets and the economy. The stock market goes down, money is withdrawn by foreign investors, depletion is observed in the country's foreign money reserves, and risks of prices going up a lot (inflation). Furthermore, the Indian currency (rupee) becomes weaker compared to the US dollar.

Moreover, FII (Foreign Institutional Investors) have turned out to be the net sellers in financials in the first half of August. This can be attributed to three main reasons: rising interest rates by the central bank, depreciation of the rupee, and the fear of recession. 

MonthNet Provisional Amount in Crores (Buy/Sell)Change Percentage (Month-on-month)
August 2023-15,821.13-2.5%
July 2023+15,533.19+2.9%
June 2023+27,250.01+3.5%
May 2023+27,856.48+2.6%
April 2023+5,711.80+4.1%
March 2023+1,997.70+0.3%
February 2023-11,090.64-2.0%
January 2023-41,464.73-2.5%

On the other hand, if the US Federal Reserve cuts its interest rates, it's good news for the Indian markets. This move attracts new foreign investors to invest in the markets. Thus, this decision will be closely watched by businesses, investors, and consumers.