Powell says the Fed will raise rates more aggressively if necessary

US Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing entitled “Semi-Annual Monetary Policy Report to Congress,” in Washington, US, March 3, 2022. Tom Williams/Paul via Reuters

(Reuters) – Federal Reserve Chairman Jerome Powell on Monday delivered his strongest message yet about his battle with hyper-high inflation, saying the central bank should move “quickly” to raise interest rates and possibly “more aggressively” to keep the rate upward from becoming entrenched. .

In observations that prompted financial markets to recalibrate for a greater likelihood of the Federal Reserve raising interest rates by half a percentage point at one or more of its remaining meetings this year, Powell noted the urgency of addressing the central bank’s less visible inflation challenge. Just a week ago, when the Fed raised its first interest rate hike in three years.

“The labor market is very strong and inflation is very high,” Powell said at a conference of the National Association for Business Economics. “There is a clear need to move quickly to bring the monetary policy stance back to a more neutral level, and then move to more restrictive levels if that is what is needed to restore price stability.”

In particular, he added, “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.”

AIG’s head of global strategy, Constance Hunter, called Powell’s speech “full responsibility here.”

US stocks tumbled, and traders – who were already betting on a rate hike of at least a quarter-point at each of the remaining six Federal Reserve meetings of the year – moved to the rate at an even better chance than a half-point rate hike at each of them. The next two meetings of the Federal Reserve are in May and June.

That would raise the short-term policy rate – which has been held for two years near zero – to a range of 2.25% to 2.5% by the end of the year, higher than the 1.9% that Fed policymakers had expected last week. Read more

Most Fed policymakers see the “neutral” level between 2.25% and 2.5%.

Powell reiterated Monday that the Fed’s cuts to its massive balance sheet could begin as early as May, a process that could further tighten financial conditions.

“This is not just going to be a tactical phenomenon in the near term,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments in New York. “This is a more strategic kind of message, I think, from the Federal Reserve.”

The consensus for a more aggressive tightening — or at least an openness to it — appears to be growing.

Atlanta Federal Reserve Chairman Rafael Bostick, who expects a slightly gentler path to price increases than most of his colleagues, said earlier Monday that he was open to larger-than-usual rate increases “if that’s what the data suggests is appropriate.” Read more

Speaking on Friday, Fed Governor Chris Waller said he favored a series of half-percentage point rate increases to have a faster impact on inflation. Read more

Tight labor market and inflation risks

The unemployment rate in the US is currently 3.8%, and job vacancies per person are at a record high, a combination that is raising wages faster than is sustainable.

“There is excess demand,” Powell said, adding that less accommodative monetary policy “in principle” could reduce pressure in the labor market and help stabilize inflation without increasing unemployment, leading to a “soft landing” rather than a recession.

Inflation in the Fed’s preferred measure is three times the central bank’s 2% target, driven upward by congested supply chains that have taken longer to fix than most people expected, and that could get worse as China responds to new COVID-19 heights with a new shutdown.

Adding to the pressure on prices, Russia’s war in Ukraine is raising the cost of oil and threatening to push inflation even higher. Powell noted that the United States, which is now the world’s largest oil producer, is better able to withstand the oil shock now than it was in the 1970s.

Although the Fed in normal times likely won’t tighten monetary policy to address what may ultimately be a temporary spike in commodity prices, Powell said, “the risk is growing that a prolonged period of high inflation could push the long-term outlook indefinitely higher.” relaxing. . “

Last year, the Fed repeatedly predicted that supply chain stresses would ease, and then repeatedly disappointed.

“As we define policy, we will look to make real progress on these issues and not assume significant supply-side easing in the near term,” Powell said Monday. This year, policymakers have begun to predict that inflation will peak this quarter and subside in the second half of the year.

“This story really fell apart,” Powell said. “To the extent that the collapse continues, my colleagues and I may come to the conclusion that we will need to move more quickly, and if that is the case, we will.”

Fed policymakers are hoping to rein in inflation without faltering growth or bringing unemployment back up, and their forecasts released last week suggest they see a path for that, with the median view of inflation dropping to 2.3% by 2024 but unemployment still at 3.6%.

Powell said he expects inflation to fall to “nearly 2%” over the next three years, and that while a “soft landing” may not be easy, there is plenty of historical precedent.

“The economy is very strong and well-positioned to deal with tighter monetary policy,” he said, adding that he does not expect a recession this year.

Analysts said it is difficult to master.

Seth Carpenter, Morgan Stanley’s chief global economist, said Powell was “reasonably upfront about the uncertainty.” “If you keep moving forward until you see the result you want, you’ve probably gone too far.”

(Covering) by Anne Sapphire and Lindsey Densmeyer Additional Reporting by Herb Lash Editing by Paul Simao and Alistair Bell

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