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Crypto markets were shaken by inflation data exceeding expectations but have now recovered. We had mentioned that the statements from Fed members throughout the week would be crucial in interpreting this data. In this context, the speeches of the members had become much more significant. At the time of writing, Fed member Michael S. Barr was making statements.
Fed Statements
To understand how the latest inflation data resonated within the Fed, we need to anticipate their statements. Michael S. Barr was making some important announcements at the time of writing. Contrary to what some might think, the latest data has not swayed him from the 2% inflation target, and he has not lost faith.
“Like many of you, I had anticipated that tight monetary policy at the beginning of 2023 would lead to a slowdown in both inflation and economic activity. Subsequently, with the banking stress in March 2023, I was concerned that a potential credit squeeze could further weaken the economy.
At the same time, I was worried that inflation could remain high even if economic activity weakened, as supply chain issues and difficulties in finding jobs continued to be significant factors disrupting the functioning of our economy.
I am pleased to say that these concerns have not materialized, partly due to the official sector’s response to banking stress, robust monetary policy, and an improving economy. Economic activity has expanded at a solid pace, the labor market has remained strong, and inflation has significantly decreased.”
So, what does he say about the current situation?
“The results we are experiencing now seemed impossible a year ago, and we may ask how we have an economy with disinflation and robust growth. The short answer is the recovery of the economy. The pandemic brought our economy to a standstill. In the second quarter of 2020, the unemployment rate rose to 14.8%, and the gross domestic product fell by an annual rate of 28%. Although these dynamics affected the most vulnerable the most, the government’s strong interventions helped mitigate the effects and made many households more resilient.
The net result of all this improvement in the economy is strong growth, even while the upward pressure on inflation decreases. This recovery has helped both sides of our dual mandate over the past year.
Considering our limited historical experience with the growth and inflation dynamics we are currently facing, and our lack of modern experience with emerging from a global pandemic, we have another reason to proceed cautiously, as we are doing.
The recovery in the economy has helped us reduce inflation while growth remains strong. This is to the benefit of the American people. The banking sector is robust, and I am focused on ensuring the resilience of this sector continues. Part of this work involves carefully examining the connections between bank liquidity, market functioning, the Federal Reserve’s provision of liquidity, and the development of our balance sheet.”
In summary, although there are ups and downs, Barr indicates that the decline in inflation is continuing, but cautious progress is necessary.
