“It’s clear that we need to act swiftly to bring our monetary policy stance back to a more neutral level,” between a strong job market and rising inflation, Powell said Monday’s National Business Association Annual. He said in a speech at the Economic Policy Conference. economic.
The central bank embarked on that journey last week when it announced its first rate hike since 2018, raising the benchmark interest rate to the 0.25 range.%-0.5%.
In doing so, the Fed is acting in line with what economists believe is best. More than three-quarters (77%) of participants in the NABE Economic Policy Survey released on Monday believe that monetary policy is too loose, and interest rates are higher.
A similar percentage of survey respondents expect inflation to exceed 3% by the end of 2023. For reference, the Fed is targeting an interest rate of about 2%.
“I believe [our] Policy measures and future measures will help reduce inflation by nearly 2% over the next three years. “
The Federal Reserve’s recommended inflation index is the Consumer Expenditure Price Index (minus food and energy costs), which was 5.2% between January 2022 and January last year.That is The highest level since April 1983. The consumer price index rose to 7.9% in the 12 months that ended in February. This is a level that hasn’t been seen since early 1982.
Atlanta Fed President Raphael Bostic reiterated the same sentiment as Powell in his speech at the conference.
Bostic raised rates six times this year and two more in 2023, raising the federal funds rate to about 2.25%, he said.
Both Bostic and Powell agree that central banks must be flexible in their approach, as much of the economy is fluid.
Banks may choose to raise rates significantly, for example by half a percentage point, at any meeting, Powell said.
Stock prices fell in response to Powell’s remarks. The Dow ended the day with a drop of more than 200 points (0.6%). It recorded five consecutive wins. The Nasdaq Composite Index (COMP) fell 0.4% and tech stocks were hit hard. Bond yields have also skyrocketed. Yields on 10-year government bonds have risen above 2.3%, the highest level since May 2019.
Ukrainian factors and risk of recession
Inflation in the United States High demand, supply chain backlogs, and other constraints caused by pandemics are not the only dark clouds on the economic horizon. The Ukrainian conflict is expected to exacerbate the price surge.
“Russia’s invasion of Ukraine could have a significant impact on the world and US economies,” Powell said. But I still don’t know what it looks like.
“There is a lot of uncertainty in today’s world and economy,” Bostic said. So, he added, “observing and adapting” is the motto of his team.
For example, as a result of the Ukrainian conflict, the world could experience the same oil price shocks as in the 1970s, Powell said. “Fortunately, the United States is now much better suited to survive the oil price shock. We are currently the largest oil producer in the world and our economy is significantly more oil than in the 1970s. It’s not aggregate, “he added.
In that case, tighter Fed policies could significantly slow demand. Central banks expect a soft landing in the economy, but a recession remains a risk.
“No one expects a soft landing to be easy in the current situation. In the current situation, it’s rarely easy,” Powell said.