Powell "Interest Rate Policy Comprehensive Review…Preparation for the End of the Ultra-low Interest Rate Era"

Federal Reserve Preparing For High Interest Rate Era (Source: Federal Reserve)

The United States Federal Reserve (Fed) announced a comprehensive review of its interest rate policy framework to respond to the changed economic environment after Covid-19. Jerome Powell, Chair of the Federal Reserve, stated at a research conference in Washington on the 15th (local time), "The economic environment has changed significantly since 2020. This review will reflect the assessment of those changes."

After adopting the average inflation targeting, the Fed maintained a strategy of keeping interest rates low even if inflation exceeded 2%, but this strategy was neutralized as inflation soared after the pandemic. By the end of 2021, the U.S. inflation rate exceeded 6%, leading to evaluations that the Fed's low interest rate policy was no longer valid.

Accordingly, the Fed intends to design a new policy structure reflecting real interest rate increases, stating that the era of more frequent and sustained supply shocks is upon us. Chair Powell suggested that raising real interest rates to prepare for a high inflation era is inevitable.

However, the 2% inflation target is planned to be maintained. Chair Powell explained, "Public confidence in stable inflation allowed for price adjustments without employment shocks," emphasizing the importance of managing inflation expectations.

The results of the policy review are expected to be released as early as August or September, and the Fed intends to adhere to the principle of reassessing its policy framework every 5 years. Experts suggest that these reforms could mean the end of the ultra-low interest rate era and predict a stronger trend towards future interest rate hikes.