The Fed Chairman delivers an important speech on monetary policy and inflation

At the highly anticipated global central bank annual meeting, the Fed chairman delivered a brief yet profound speech, reiterating the Fed's firm stance against inflation. He emphasized that the current priority is to bring the inflation rate down to the target level of 2% and stated that strong measures will be taken to balance supply and demand, thereby curbing inflation.

The chairman pointed out that the Fed is working to raise interest rates to a level that restricts economic growth and to maintain that level for a period of time. He warned that historical experience suggests that policies should not be relaxed too early.

Regarding the interest rate hike in September, the chairman stated that it will depend on the overall economic data and economic outlook at that time. Although the inflation data in July showed some improvement, he believes this is not enough to change the Fed's policy path of continuing to raise interest rates. He emphasized that the Fed will not be swayed by one or two months of data, and the current inflation situation remains severe.

The chairman expects that continued interest rate hikes may bring some "pain" to the economy, but he believes it is a necessary price to pay to reduce inflation. He stated that restoring price stability will take time, which may result in economic growth being below trend levels, and the labor market may also show signs of weakness.

It is worth noting that the chairman rebutted the market's expectation of interest rate cuts starting in the second half of 2023; instead, he anticipates that the benchmark rate will be only slightly below 4% by the end of next year. This statement echoes the views of some other Fed officials, who believe that it may be necessary to raise rates above 4% and maintain them for a period of time.

The chairman also emphasized the importance of managing inflation expectations, believing that this is key to avoiding a repeat of the significant interest rate hikes that led to an economic recession in the 1980s. He stated that the Fed's responsibility to achieve price stability is "unconditional" and will persist until the task is completed.

Nevertheless, the chairman also mentioned that it might be appropriate to slow down the pace of interest rate hikes at some point. However, this statement seems to have failed to calm market sentiment, as financial markets reacted strongly to this speech, with stock markets falling sharply, U.S. Treasury yields rising, the dollar index strengthening, and gold prices declining.

The futures market's expectation for a 75 basis point rate hike in September has also risen significantly, from around 45% before the speech to over 60%. This indicates that the market's expectation for the Fed to continue taking a tough stance to curb inflation is strengthening.