Jerome H. Powell, the chairman of the Federal Reserve, indicated on Thursday that the central bank is willing to raise interest rates quickly from May as it tries to cool the economy and prevent rapid inflation from becoming a permanent feature.
A more than usual half a percentage point increase “will be on the table for the May meeting,” Mr Powell said on Thursday, after explaining that at a time of high inflation “it is appropriate in my view to move a little faster” to raise borrowing costs in an effort to cool demand and the economy in general.
Mr Powell’s comments, during an International Monetary Fund’s debate on the global economy, are likely to bolster investors’ expectations of a major rate hike at the central bank’s May 3-4 meeting.
He spoke at a challenging time for the United States and the global economy. Growth has recovered strongly since the start of the pandemic, but that progress has been accompanied by stubbornly rapid inflation in the Americas and other economies.
While prices are rising at a pace not seen in decades, the Russian war in Ukraine is exacerbating the situation by further disrupting supply chains and driving up gas prices. At the same time, the conflict is expected to fuel recessions in several Eastern European economies this year and hurt the global economic outlook.
Understanding inflation in the US
While US policymakers have monitored risks to growth, from a domestic economic perspective they are even more concerned about the impact of the war on inflation. The US consumer price index for March showed prices rose 8.5 percent year-on-year, the fastest pace since 1981, as oil prices rose during the conflict, rents continued to rise and a range of goods and services became more expensive.
The magnitude and continued high inflation in the US has upset Mr Powell and his colleagues. While they had initially hoped that rapid price increases would ease as the economy returns to normal, the Fed began raising interest rates in March to prevent high inflation from becoming more permanent.
Even since their meeting last month, officials and markets have come to anticipate a much faster pace of the Fed’s measures to slow the economy. Fed officials predicted in March that they would raise interest rates by seven quarters of a point by 2022; Officials who have long pushed for low rates are now suggesting nine would likely be appropriate.
To fit in those many hikes, the Fed will have to raise interest rates by half a point at some meetings. As of Thursday morning, investors expected Fed officials to raise interest rates by half a percentage point during their upcoming meeting, and by at least that much during their next two meetings, so that interest rates would rise from less than 0.5 percent now to above 2 percent. percent in July.
Mr Powell said on Thursday that “there is something about the idea of front-end loading of whatever accommodation it sees fit,” meaning the central bank could raise interest rates more aggressively at the outset if it tries to keep the inflationary situation in check. to get .
Market prices suggest that by the end of the year, rates will approach 3 percent, a level they haven’t reached since before the 2008 financial crisis.
As Fed officials work to cool the economy, they expect to tie their rate hikes to a plan to shrink their balance sheet, which was blown up by pandemic-era bond purchases intended to calm the economy. Reducing those positions will drive up interest rates over the longer term and further slow borrowing. A plan for the balance sheet could come in May and launch in June, officials have signaled.
The US Federal Reserve’s withdrawal of policy support comes as rapid wage increases, soaring housing costs and mounting price pressures in the services sector, combined with global supply disruptions, paint an uncertain picture of the inflation outlook. Officials have become more convinced that price increases will not fade unless they actively slow the economy to get them under control.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“In the case of the United States, we expected inflation to peak around this time and then decline,” Powell said on Thursday. “These expectations have been disappointed in the past.”
He said price increases may have peaked in March, but “we don’t know, so we’re not going to count on it,” and policymakers won’t count on help from an improved supply either.
Persistent price increases have prompted a growing number of policymakers to demand policy rates that are not only ready to react when necessary, but are high enough to actually weigh on economic activity.
“More fine-tuning is needed to steer monetary policy on a neutral, somewhat restrictive stance,” Charles Evans, president of the Federal Reserve Bank of Chicago, said at an event this week. “We’ll probably end up with something more restrictive.”
An important question is whether the Fed will be able to cool the economy and keep inflation in check without sending the U.S. economy into a recession, a recession that drives up unemployment and wipes out some of the gains that have been made. after the pandemic lockdowns.
Fed officials, including Mr. Powell, have acknowledged that striking that balance — while possible — can be challenging.
“That’s our goal,” said Mr. Powell on a soft landing, noting that no one at the Fed would argue it would be easy to achieve.
“I don’t think you’ll hear anyone at the Fed say that’s going to be straight forward or easy,” he said. “It will be quite a challenge. We will do our very best to achieve that.”
