After pulling off the Federal Reserve's first rate hike since 2018 without throwing financial markets into turmoil, Federal Reserve Chair Jerome Powell went ahead and stirred the pot this week with a series of public talks signaling a firmer hand from the central bank going forward.
The first ripple came on Monday when Powell delivered a speech suggesting that the Fed could pick up the pace of interest rate hikes if it is necessary to bring down prices.
"We will take the necessary steps to ensure a return to price stability," he said. "In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so."
Powell also hinted that future rate hikes could bring an economic downturn.
"I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context," he said. "And monetary policy is often said to be a blunt instrument, not capable of surgical precision. My colleagues and I will do our very best to succeed in this challenging task."
The comments sent stocks down on Monday, and stoked fear among cryptocurrency holders, given that digital assets have largely moved in tandem with stock markets.
Powell then delivered another blow to non-traditional finance on Wednesday during a panel for the Bank of International Settlements, when he called for new rules for digital assets.
"Our existing regulatory frameworks were not built with a digital world in mind," he said. "Stablecoins, central bank digital currencies, and digital finance more generally, will require changes to existing laws and regulation or even entirely new rules and frameworks."
While Powell didn't outline any specific rules or explain what role the Fed might play in enforcement, he noted that digital finance poses a threat to financial stability and that many consumers don't understand the risks they're taking when they invest.
"We don't know how some digital products will behave in times of market stress, which could lead to large destabilizing flows, nor do we know how stresses in crypto markets could potentially spill over into the traditional financial system," Powell said.
He also noted that the Fed has "long supported responsible innovation," but that it can be hard to tell the difference between hype and innovation that will have a lasting effect.
What explains Powell's shift in tone from last week's FOMC meeting, when the chair took pains to ease markets into their first rate hike in four years?
Some are attributing the public comments to what some call the "Powell Ratchet." Basically, as soon as markets get comfortable with a move from the Fed, Powell lets his hawkish flag fly.
