Powell says the Fed will increase further and faster if needed
WASHINGTON (AP) — Chairman Jerome Powell said Monday that the Federal Reserve would raise its benchmark short-term interest rate faster than expected and high enough to dampen growth and hiring, if it decides it is necessary. to slow runaway inflation.
Powell’s message was more hawkish than his comments after last week’s Fed meeting, when officials raised their key rate by a quarter point from near zero to a range of 0.25% at 0.5%. (“Hawks” generally support higher rates to stave off inflation, while “doves” generally prefer lower rates to support hiring).
His remarks, in a speech to the National Association for Business Economics, sent the stock market down sharply, implying that potentially much higher rates could be on the way for mortgages, auto loans, credit cards credit and other consumer and business loans. . US stocks then rallied, with the S&P 500 index ending the day down less than 0.1%.
Powell said that if necessary, the central bank would be willing to raise rates by a relatively aggressive half point at several Fed meetings. The Fed has not raised its key rate by half a point since May 2000.
He also added that policymakers could go so far as to send rates into “restrictive” territory that would slow economic growth and possibly raise the unemployment rate, if needed to rein in high inflation.
“We will take the necessary steps to ensure a return to price stability,” the Fed Chairman said in his address to NABE’s annual economic policy conference. “In particular, if we conclude that it is appropriate to act more aggressively by raising the federal funds rate by more than a quarter point at a meeting or meetings, we will do so.”
The Fed is under pressure from widespread criticism that it reacted too slowly to a price spike that catapulted inflation to four-decade highs. When they met last week, Fed officials forecast they would raise rates six more times this year and four times in 2023. They also forecast inflation to slow to 2.7% d by the end of next year.
Powell warned on Monday that these projections of future interest rates and inflation “can quickly become outdated at times like these, when events are developing rapidly.”
According to a NABE survey of its member economists, 77% think the Fed’s interest rate policy remains too low. Almost the same proportion said they believe inflation will stay above 3% next year, suggesting that the Fed’s inflation expectations are overly optimistic. NABE members work primarily for large corporations, consulting firms and trade associations.
Last week, Fed policymakers forecast that the economy would remain resilient enough to continue growing and that the unemployment rate would fall from its current level of 3.8% to 3.5% by the end of the month. year, corresponding to a 50-year low reached before the pandemic.
Some economists argue that such a painless outcome – what they call a “soft landing” – is unrealistic, given the challenges facing the economy, including the potential for deeper economic disruption from the invasion. of Ukraine by Russia. The war has already raised the price of oil, wheat, nickel and other vital commodities.
But Powell said the Fed has already made soft landings.
“I think the historical record offers grounds for optimism,” he said. “Soft, or at least soft, landings have been relatively common in American monetary history.”
Still, the Fed Chairman added that “no one expects a soft landing to be simple in today’s environment – very little is simple in today’s environment.”
He acknowledged that the rise in oil and commodity prices is reminiscent of the oil price spikes of the 1970s, which fueled soaring inflation during that decade. It was not until the early 1980s, after Chairman Paul Volcker raised the Fed rate to nearly 20%, that inflation was brought under control.
“Not a happy experience,” admitted Powell.
But he argued that the US economy is less sensitive to oil prices now, in part because it is more fuel efficient.
Powell pointed to a near-record level of open jobs, which topped 11 million in January. This equates to 1.7 available positions for each unemployed person.
He suggested that higher rates from the Fed could slow consumer spending enough to reduce this outsized demand for workers, which, in turn, would reduce wage growth to a level that would not stimulate the economy. inflation.
“It’s an unbalanced labor market,” Powell said, which he acknowledged was good for workers because it meant higher wages for many. But these wage gains can also lead companies to raise prices to offset their higher labor costs.
“We need the labor market to be permanently tight,” he said.
Powell’s remarks followed a flurry of comments from officials regarding Fed policy since last week’s meeting, all pointing in a hawkish direction.
Also on Monday, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said controlling inflation “is the main concern I have for 2022.”
Bostic also said he expects the Fed to hike rates a total of six times this year and two more in 2023. That’s a more dovish approach than most of his colleagues. But he stressed that this was mainly due to the extreme uncertainty currently surrounding the economy. If more rate hikes were needed to slow inflation, he would support them, he said.
On Friday, influential Fed board member Christopher Waller sounded a hawkish note in an interview on CNBC. He said he could support half-point rate hikes at each of the next two meetings of Fed policymakers.
Waller argued that while economic data was “essentially screaming at us” to raise rates by half a point at last week’s meeting, the economic uncertainty created by Russia’s invasion of Ukraine led him to support a lower increase out of caution.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, who is among the most dovish policymakers, wrote that he fears consumers, buoyed by hiring and wage gains, will continue to spend at an accelerated pace as companies are struggling to meet this demand. This model, he suggested, would keep inflation high.
If the trend continues, the Fed “will have to act more aggressively” and raise rates high enough to slow growth, Kashkari said.
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