Federal Reserve Chairman Jerome Powell says he may have to “aggressively” raise interest rates to fight record inflation that is “too high.”
- Last week, the Fed raised its benchmark interest rate by a quarter percent to 0.25-0.5 percent.
- Officials have planned a series of 0.25% hikes over the remainder of the year, raising rates to 2% by the end of 2022.
- “If we conclude that it is appropriate to move more aggressively … than 25 basis points in the meeting or meetings, we will do so,” he said.
- Talk of a rate hike came after the consumer price index reached 7.9% in February, the highest inflation rate in four decades.
Federal Reserve Chairman Jerome Powell said on Monday that the central bank may have to become more “aggressive” with interest rate hikes because inflation is “too high.”
Last week, the Fed raised its benchmark interest rate by a quarter percent to 0.25-0.5 percent. Officials have planned a series of 0.25% hikes over the remainder of the year, leading to rate increases to 2% by the end of 2022 and 2.75% next year.
“The labor market is very strong and inflation is too high,” Powell said in a speech to the National Business Economics Association.
“We will take the necessary steps to ensure a return to price stability,” he said. “If we conclude that it is appropriate to act more aggressively by raising the federal funds rate by more than 25 basis points in a meeting or meetings, we will. And if we decide that we need to tighten the measures beyond the usual measures of neutrality and move to a more restrictive stance, we will do that as well.”
Federal Open Market Committee officials have indicated a 25 basis point (0.25 percent) increase is likely in each of the six remaining meetings this year, but markets are estimating a 50-50 chance that the next increase in May could be 50 basis points.
Talk of a rate hike came after the consumer price index hit 7.9 percent in February, the highest inflation rate in four decades. The Core Personal Consumption Expenditure Index (PCE), the Fed’s preferred benchmark, is 5.2 percent, still well above the Fed’s 2 percent target.
“The labor market is very strong and inflation is too high,” Powell said in a speech to the National Business Economics Association.
The war in Ukraine had not yet been factored into the price hikes that erupted in late February, and Powell stressed the uncertainty of its consequences. However, Powell acknowledged that the outlook for inflation had “significantly worsened even before Russia’s invasion of Ukraine.”
He warned that the fallout from the war in Europe and tough Western sanctions could exacerbate supply chain disruptions.
“There is no recent experience of significant market disruption across such a wide range of commodities,” Powell said. He compared the soaring cost of fuel to the sharp rise in oil prices in the 1970s.
The Fed now faces the challenge of drawing the fine line between containing current inflation rates and avoiding too aggressive a response that could trigger a recession.
Such a “soft landing” would be difficult, Powell said. “No one expects a soft landing to be easy under the current conditions – there are very few simple things under the current conditions.”
Monetary policy is “a blunt instrument, incapable of surgical precision,” Powell said. “My colleagues and I will do our best to complete this challenging task.”
The Fed spent much of the past year insisting that inflation was “temporary” and even in January expected inflation to ease in 2022 as supply chain bottlenecks are cleared.
“This story has already fallen apart,” Powell acknowledged on Monday. “As it continues to fall apart, my colleagues and I may well conclude that we need to move faster. And if so, then we will.
Last week’s rate hike was the first since 2018 as rates have been kept near zero since the start of the coronavirus pandemic as Powell advocated maximum employment with higher inflation tolerance.
When the Fed raises its short-term rate, the cost of borrowing also typically increases for consumer and business loans, including for homes, cars, and credit cards.
The Fed said it would consider cutting its balance sheet by $9 trillion “at its next meeting.”
The central bank now projects headline inflation to rise by 4.3 percent this year alone, with the core personal consumption expenditure price index rising by 4.1 percent.
The unemployment rate is expected to fall to 3.5% this year and remain at that level next year, but is projected to rise slightly to 3.6% in 2024.
Since then, the US has rebuilt all but 2.1 million of the 20 million jobs lost during the coronavirus pandemic.
For the past two years, the Fed has been buying at least $120 billion a month in Treasury and mortgage-backed securities to stimulate the economy.
Powell called high inflation the biggest threat to a strong economy and acknowledged that the Fed may not have correctly predicted how long it would last.
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