Federal Reserve Chair Jerome Powell stated Monday that the U.S. central banks must act “expeditiously” to curb excessive inflation. He said that they will use larger-than-usual interest rates hikes to do this if necessary.
Powell stated that the labor market was very strong and that inflation is too high at a National Association for Business Economics conference. “It is imperative that we move quickly to return the stance on monetary policy to a neutral level and then move to more restrictive levels, if necessary to restore price stability.”
He said, in particular, that “if we decide it is appropriate to move aggressively by raising federal funds rates by more than 25 basis points at a meeting, or any other meetings, then we will do so.”
Last week, Fed policymakers raised interest rates for only the third time in three years. They also signaled that they would continue to raise rates. Most see the short-term policy rate – pinned for two years near zero – at 1.9% by the end of this year, a pace that could be achieved with quarter-percentage-point increases at each of their next six policy meetings.
Fed policymakers anticipate that the benchmark overnight interest rate of the central bank will be 2.8% by the end of next year. This would bring borrowing costs down to a level that allows them to start to bite into growth. Fed policymakers consider the neutral level to be somewhere between 2.25 and 2.5%.
Powell reiterated Monday that the Fed could begin reducing its huge balance sheet by May. This could lead to tighter financial conditions.
U.S. stocks extended earlier losses after his remarks and traders boosted bets that the Fed will deliver a half-percentage-point rate hike at its policy meeting in May.
Kevin Flanagan from WisdomTree Investments, New York, said that “this is not going to be just a near-term tactical phenomenon.” “This is a more strategic type of messaging, I believe, from the Fed.”
There seems to be a growing consensus for tighter controls or at the very least, an openness to them.
Raphael Bostic of the Atlanta Fed, who anticipates a slightly more gentle path to rate increases than his colleagues, stated earlier Monday that he was open to larger-than-usual rate rises “if it’s what data suggests is appropriate.”
Chris Waller, Fed Governor, stated that he favors a series of half-percentage rate increases to reduce inflation.
Current U.S. unemployment rates are 3.8% and per-person job openings are at an all-time high. This combination is pushing up wages faster than is sustainable.
Powell stated that there is excess demand. He also said that “in principle”, the less accommodative policy could help reduce labor market pressure and stabilize inflation without increasing unemployment. This would create a “soft landing” instead of a recession.
The Fed’s preferred gauge of inflation is three times that of the central bank’s goal of 2%. This has been pushed up by snarled supply chain that took longer to fix than many had anticipated. And that could get worse as China reacts to new COVID-19 surges by applying fresh lockdowns.
Russia’s war against Ukraine is putting more pressure on oil prices and threatening to push inflation higher. Powell pointed out that the United States is now more capable of surviving an oil shock than it was in the 1970s.
Powell stated that although the Fed would not normally tighten monetary policy to deal with what may end up being a temporary rise in commodity prices, the risk is increasing that longer-term inflation expectations could be uncomfortably high.
The Fed forecast that supply chain pressures would decrease last year repeatedly, but was repeatedly disappointed.
Powell stated Monday that as we establish policy, we will look to real progress on these issues rather than assuming substantial near-term supply-side relief. This year’s policymakers started the year anticipating that inflation would rise in the first quarter of the year and then cool down in the second half.
Powell stated, “That story is already falling apart.” “To the extent that it continues to crumble, my colleagues, and I, may come to the conclusion that we need to move faster and, if necessary, we will.”
Fed policymakers want to control inflation without slowing growth or increasing unemployment. Their forecasts last week suggested that they see a way to do this. The median view of inflation is at 2.3% by 2024, but unemployment remains at 3.6%.
Powell stated that he expected inflation to fall to “nearly 2%” in the next three years and that, while a “soft landing”, may not be possible, there are plenty of historical precedents.
He stated that the economy was strong and well-placed to manage tighter monetary policies.