Fed will raise interest rates more aggressively if needed, Powell says

The central bank of United States it must act “quickly” to rein in too high inflation, Federal Reserve Chairman Jerome Powell said on Monday, and will apply higher-than-usual interest rate hikes if necessary to slow prices.

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

In particular, he added, “if we conclude that it is appropriate to act more aggressively by raising the fed funds rate by more than 25 basis points at a meeting or meetings, we will do so”.

Last week, the authorities of the fed they raised the interest rates for the first time in just over three years and signaled that more increases are on the way.

Most of them see the short-term policy rate, which has hovered near zero for two years, at 1.9% by the end of this year, a pace that could be achieved with increases of a quarter of a percentage point in each one of its next six monetary policy meetings.

By the end of next year, officials at the fed they expect the benchmark overnight rate to come in at 2.8%, which would push borrowing costs to a level where they would actually start to weigh on growth. Most of the agency’s authorities see the “neutral” level as between 2.25% and 2.5%.

Powell reiterated Monday that reductions in the fed to its huge balance sheet could start in May, a process that could tighten financial conditions even more.

Furthermore, a consensus for more aggressive tightening, or at least an opening to it, appears to be growing.

The president of the fed Raphael Bostic of Atlanta, who expects a slightly smoother path of rate increases than most of his colleagues, said Monday that he is open to larger-than-usual hikes “if that’s what the data suggests is appropriate.” .

And speaking on Friday, the governor of the fedChris Waller said he would be in favor of a series of increases in rates of half a percentage point to have a faster impact on inflation.

The US unemployment rate is currently 3.8% and job openings per person are at a record level, a combination that is driving up wages faster than is sustainable.

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

Inflation risks

Inflation according to the preferred indicator of the fed triples the central bank’s 2% target, fueled by supply chain complications that have taken longer to fix than most expected and could get worse as China responds to new COVID-19 surges with new confinements.

Adding to the pressure on prices, Russia’s war in Ukraine is driving up the cost of oil, threatening to drive up inflation even further. The United States, now the world’s largest oil producer, is better able to withstand an oil shock now than it was in the 1970s, Powell noted.

Although the fed In normal times it probably wouldn’t tighten monetary policy to deal with what could ultimately be a temporary spike in commodity prices, Powell said, “increasing the risk that a prolonged period of high inflation could cause expectations to rise.” in the long run are uncomfortably higher.”

Last year, the fed repeatedly predicted that supply chain pressures would ease and was repeatedly disappointed.

“As we set monetary policy, we will look for real progress on these issues and will not assume significant supply-side easing anytime soon.”Powell said Monday. The agency’s authorities began the year with the expectation that inflation would peak this quarter and cool down in the second half.

“That story has already collapsed”Powell said. “To the extent that it continues to unravel, my colleagues and I may well come to the conclusion that we will have to act faster, and if so, we will.”.

The authorities of the fed they hope to control inflation without hampering growth or causing unemployment to rise again, and their forecasts released last week suggest they see a path to that, with a median inflation outlook falling to 2.3% by 2024, albeit with the Unemployment still at 3.6%.

Powell said Monday that he expects inflation to fall “close to 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 handle a more restrictive monetary policy,” he said.