Powell recently warned that the Federal Reserve will make significant adjustments to monetary policy, and the era of high interest rates will continue; Powell has laid back. The Federal Reserve will review its monetary policy framework every five years. A few days ago, Powell revealed the thoughts behind the adjustments on how the Federal Reserve will cut interest rates, whether monetary policy will continue to be accommodative or lean towards tightening, and whether this market will be favorable or unfavorable? Powell reviewed the three phases of monetary policy that the Federal Reserve has gone through from the 2008 subprime mortgage crisis to now.
First, from the 2008 subprime mortgage crisis to 2020, the U.S. economy was in a state of three lows: low interest rates, low growth, and low inflation. During this time, the Federal Reserve mainly kept lowering long-term rates, allowing the low-interest environment to stimulate economic growth. Due to the pandemic in 2021, the U.S. economy suddenly fell off a cliff. The Federal Reserve was forced to open the floodgates and release massive amounts of money, leading to rising inflation in the U.S.
At this time, the Federal Reserve introduced the average inflation targeting regime, which means tolerating inflation running a little faster temporarily; thus, the previous 1% can become 3% in the future, using this method to stimulate slow economic growth. It turns out that the Federal Reserve was still too naive; once inflation was released, it suddenly skyrocketed. U.S. inflation not only reached 3%, but also soared to 5%, with the highest core inflation soaring as high as 7%.
Thus, the Federal Reserve conducted the fastest round of significant interest rate hikes in history, with rates soaring directly to 525 basis points. After two years of arduous efforts, U.S. inflation not only returned from 7% to 2%. Now, the U.S. economy remains resilient; originally, the story should end perfectly here, and Powell could say he has achieved success and retired, leaving a name in history.
However, Powell's lifelong rival, the formidable King, has come. His sudden tariff policy has disrupted all of the Federal Reserve's plans. Now, the U.S. economy is not only slowing down, but prices are also rebounding again, with the prospect of stagflation looming.
In this situation, Powell revealed a sense of helplessness; the new monetary framework can be described in two words: the Federal Reserve has laid flat. The Federal Reserve acknowledges that future economic uncertainties have significantly increased, and it is very likely that friction between major countries will cause shortages in the U.S., rising prices, economic recession, and other situations that the Federal Reserve cannot manage at all.
The Federal Reserve can only formulate monetary policy more flexibly, abandoning the so-called average inflation targeting and instead acknowledging that there will be relatively high inflation for a long time to come. Therefore, higher for longer, the Federal Reserve is likely to maintain high interest rates for a considerable period in the future. It’s as if Powell is telling the financial markets before his retirement that he is truly exhausted. The likely scenario next is that the Federal Reserve will significantly weaken its control over the market and hand over the control to the understanding of the king and the Treasury’s Basent, managing the U.S. financial market through controlling U.S. Treasury yields, while the Federal Reserve will play a more cooperative role.
From a short-term perspective, there will be 1 to 2 more interest rate cuts this year. However, in the long term, the room for further interest rate cuts has been compressed again, and the era of high interest rates will continue. So how should we respond to investment allocation in such an era?#美联储会议 
