On the second day of testifying before the Senate committee, Jerome Powell talked about high inflation and the attempts of the Fed to tackle it. At the moment, core inflation in the US continues to run at least three times higher than the Fed's targeted level of 2%. The CPI currently stands at 8.6%.
Inflationary pressure has never been so strong and persistent since the 1980s. Earlier, the Fed Chair said that the US Federal Reserve was well aware of the challenges it was facing and was able to bring inflation down to the target level of 2%.
However, in reality, prices have been accelerating in the past few months. Obviously, Fed's expectations that some components of supply chains will improve were not met.
Over the past three meetings, the FOMC has raised the rate to bring the funds rate to 1%. The Fed policymakers, including Jerome Powell, made it clear that they would continue to raise the rates, and the scope of monetary tightening would depend on the economic situation. Apparently, at its next meeting in July, the FOMC will increase the rate once again. The same will happen in September.
On Thursday, Federal Reserve Governor Michelle Bowman said she supported a 75-basis-point increase in July which may be followed by 50-basis-point increases in the next few subsequent meetings.
The Fed intends to bring its benchmark interest rate to 3.5% by the end of the year. Even if the US Federal Reserve raises the rate by 24% by the year-end, this might still not be enough to control current inflation.
In other words, it seems that the US regulator is unable to fight inflation that stems from supply disruptions.
Another cycle of monetary tightening may lead to a recession. The question is when the recession will hit and how deep it will be.
The current situation has had an impact on the precious metal market where gold and silver have sharply dropped in value.
As interest rates keep rising, safe-haven assets will remain under pressure.
Ideally, interest rates should keep up with the current inflation rate in order to be effective.