The Federal Reserve (Fed) has unexpectedly changed its stance on inflation, causing significant concern in global markets. Following comments from Chair Jerome Powell about abandoning the usual 2% inflation target, many investors are questioning the potential economic impact.
From Hawkish to Hesitant
During the July 30 FOMC meeting, Powell expressed concern that inflation was still above target, despite job goals being met. As a result, inflation rose from 2.9% to 3.1% in just two weeks, underscoring his worries.
The Fed has kept rates high for over a year, but signs of slowing job growth and rising unemployment create new risks. Powell stated the labor market is in a 'middle ground', not strong enough for confidence, yet not weak enough for immediate action.
Why $1 Trillion Vanished?
Following Powell’s comments, markets reacted with anxiety. Investors, sensitive to Fed signals, panicked at the potential policy reversal. Within hours, almost $1 trillion in market value disappeared.
This sharp sell-off reflects how nervous investors are about whether the Fed can still manage a 'soft landing', slowing inflation without crashing the economy.
Policy Evolution or Policy Desperation?
Investors are uncertain whether Powell is being flexible with new data or simply reacting too late. U.S. job reports keep getting revised lower, while trillions in new government spending add more pressure.
Some analysts fear stagflation, a mix of high inflation and slow growth, could return. Others worry ongoing global tensions and policy delays could exacerbate the situation.
The Fed's shift in direction and the market's extreme reaction raise questions about the future of economic policy. Investors will closely monitor the regulator's actions and the state of the economy in an attempt to predict the next step.
