According To Powell, The Fed Will Raise Interest Rates More Aggressively As Needed

Federal Reserve Chair Jerome Powell testified at a Senate Banking Commission hearing entitled “Semi-Annual Monetary Policy Report to Congress” on March 3, 2022 in Washington, DC. To do. Thom Williams / REUTERS via pool

March 21 -Federal Reserve Chair Jerome Powell delivers the most muscular message ever on the fight against high inflation, with central banks acting “quickly” to raise interest rates. Must do, rising price spiral from settlement.

Powell said at one or more of the remaining meetings of the year that the Federal Reserve has confused financial markets to increase the likelihood of raising interest rates by 0.5 percentage points, urgently addressing central bank inflation challenges. Was shown. Just a week ago, than when the Fed raised rates for the first time in three years.

“The labor market is very strong and inflation is too high,” Powell said at a meeting of the National Association for Business Economics. “We need to act swiftly to return our monetary policy stance to a more neutral level, and move to a more restrictive level if it is necessary to restore price stability. Is obvious. “

In particular, he added, “If we decide that it is appropriate to act more aggressively by raising the federal funds rate by 25 basis points or more at one or more meetings, we will do so.”

Constance Hunter, AIG’s Head of Global Strategy, called it Powell’s “Gold Stops Here” speech.

U.S. stocks have fallen, and traders have already bet at least a quarter point rate hike at each of the remaining six Fed meetings this year, better than the possibility of a half-point rate hike each. Migrated to. The next two meetings of the Fed in May and June

This will raise the near-zero short-term policy rate to the range of 2.25% to 2.5% by the end of the year, higher than the Fed’s policymakers expected last week at 1.9%.read more

Most Fed policy makers see the “neutral” level somewhere between 2.25% and 2.5%.

Powell reiterated on Monday that the Fed’s reduction to a large balance sheet could begin by May. This process could further tighten financial conditions.

“This isn’t just a short-term tactical phenomenon,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments in New York. “I think this is a more strategic type of messaging from the Fed.”

There seems to be a growing consensus on more aggressive tightening, or at least openness to it.

Atlanta Fed President Raphael Bostic said earlier Monday that he was hoping for a slightly more gradual rate hike than most of his colleagues, “if the data suggests it is appropriate.” He said he would accept a larger rate hike than usual.read more

In a speech on Friday, Fed Governor Chris Waller said he would support a series of half-percentage rate hikes to have a swift impact on inflation.read more

Tight labor market, inflation risk

The US unemployment rate is currently 3.8% and the per capita unemployment rate is record high, a combination that is pushing wages faster than sustainable.

“There is excessive demand,” Powell said. “In principle,” accommodative monetary policy eases labor market pressure, stabilizes inflation without boosting unemployment, and is “soft” rather than recession. He added that it could create a “landing”.

Inflation from the Federal Reserve’s priority gauge is three times the central bank’s 2% target, taking longer to correct than most expected, as China responds to the surge in the new COVID-19 with a new blockade. It is pushed up by a roaring supply chain that can get worse.

In addition to price pressure, the Russian war in Ukraine is pushing up oil costs and could further increase inflation. Powell said the United States, currently the world’s largest producer of oil, can withstand more oil shocks than it did in the 1970s.

The Fed in peacetime is unlikely to tighten monetary policy to deal with what could end up in a temporary rise in commodity prices, but Powell said, “Long-term high inflation is long-term. There is an increased risk that expectations may be unpleasantly raised. “

Last year, the Fed repeatedly predicted that supply chain pressure would ease, and was repeatedly disappointed.

“In setting the policy, we will focus on the actual progress of these issues and do not envision significant short-term supply-side bailouts,” Powell said on Monday. Policymakers began this year expecting inflation to peak this quarter and cool in the second half of this year.

“The story has already collapsed,” Powell said. “As long as it continues to collapse, my colleagues and I may come to the conclusion that we need to act faster. If so, we will.”

Fed policy makers want to curb inflation without trampling growth or recovering unemployment. Median inflation will drop to 2.3% by 2024, but unemployment remains at 3.6%, according to forecasts released last week.

Powell expects inflation to drop to “nearly 2%” over the next three years, and while “soft landing” may not be easy, he said there are many historical precedents.

“The economy is very strong and in a good position to handle monetary tightening policies,” he added, adding that he does not anticipate a recession this year.

According to analysts, finesse is a difficult trick.

Seth Carpenter, chief global economist at Morgan Stanley, said Powell “reasonably expected uncertainty.” “If you continue until you see the results you want, you may have gone too far.”

Report by Ann Saphir and Lindsay Dunsmuir Additional report by Herb Lash Edited by Paul Simao and Alistair Bell

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