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The new Fed chief needs to find a balance between growth and inflation

While investors are still trying to come to terms with last week’s monster sell-off, it has definitely set a precedent in the financial markets – stocks responding negatively to positive data! Optimists call it ‘correction’, but experts believe there is more to the surprise stock movement than meets the eye.

There is no doubt the US bourses took a cue from the recent change of guard at the Federal Reserve. Leading stock markets across the world were quick to respond to the crash, in which investors lost trillions of dollars. Some experts blame it on the hawkish traits of Jerome Powell, who took over the reins of the central bank. He is expected to hike interest rate further, and at a faster pace compared to his predecessor Janet Yellen. For Powell, the primary goal will be to rein in inflation considering the strong momentum in economic recovery, and he would remain unperturbed by the hue and cry for a softer approach.

Jerome Powell (Courtesy: Federalreserve, Flickr)

The latest developments indicate the economy is entering a new phase, emerging from the shadows of the long-drawn contraction triggered by the 2008 crisis. And, the key interest rate is hopefully returning to its normal level from record lows.

Meanwhile, Powell has hinted at a balanced approach to monetary policy, and promised to closely monitor the setback suffered by the business sector in the aftermath of the stock market crash, while moving ahead with monetary tightening.

Adding to the woes of investors and signalling the sell-off could continue in the coming days, consumer price inflation accelerated at a faster-than-expected pace to 0.5% in January, driving the stock market further down. The S&P index retreated ending the brief recovery witnessed after the big crash, and treasury yields returned to the multi-year highs seen last week.

Powell has hinted at a balanced approach to monetary policy, and promised to closely monitor the setback suffered by the business sector in the aftermath of the stock market crash, while moving ahead with monetary tightening.

The inflation ghost had reared its head after government reports early this month showed a record fall in jobless rate and strong wage gains. Since then, inflation has been tightening its grip on the economy.
The situation calls for a closer examination of the effects the high interest rate could have on the broader economy. For instance, latest data revealed a marked dip in weekly mortgage applications, and there cannot be any other reason than the market turmoil.

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Responding to the high commodity prices, the retail sales index, a key indicator of the health of the economy, registered the largest fall in nearly one year led by the automobile and the building sectors, contrary to expectations of a modest rise.

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