Federal Reserve Chairman Jerome Powell said the central bank was prepared to raise interest rates in half-percentage-point increments high enough to deliberately slow the economy if it concluded that such measures were justified to bring inflation down.

“If we think it is appropriate to increase [by a half point] in a meeting or meetings, we will,” Powell said in a moderated discussion after a speech Monday at the National Association for Business Economics in Washington, DC.

Mr Powell’s remarks took on a harsher tone than he used days earlier at a press conference after the Fed voted to raise its benchmark rate by a quarter point, and he signaled a stronger tendency to raise rates until the central bank sees clear evidence that inflation is falling to its 2% target.

The Fed raised the rate from near zero to a range between 0.25% and 0.5% last week, and officials have forecast a series of further increases taking it to just under 2% at the end of the week. end of this year and around 2.75% next year.

Mr Powell has repeatedly underscored the uncertainty facing Fed officials as they navigate the aftermath of the Covid-19 pandemic and the recent war in Ukraine, and he said they were prepared to steer their policy in a more disruptive direction.

“If we determine that we need to tighten beyond common neutrality measures and adopt a more restrictive stance, we will do so as well,” Powell said. Most Fed officials believe that a neutral rate is close to 2.5%, assuming annual inflation is 2%.

Stocks and bonds fell as Mr Powell spoke. The Dow Jones Industrial Average closed down 0.58% on Monday. The yield on the benchmark 10-year Treasury rose to 2.298% in afternoon trading, as yields rise as bond prices fall.

“Powell really stepped in here and detailed a lot of serious inflation concerns in the context of a labor market that is arguably overheated,” said Tim Duy, chief economist at research firm SGH Macro Advisors. Compared to Mr Powell’s press conference last week, in which he spoke on behalf of the central bank’s rate-setting committee, “it was even more explicit and probably more representative of his own opinion”.

Annual inflation rose to 6.1% in January, according to the Fed’s preferred gauge, according to the latest available data. Core inflation, which excludes food and energy, rose to 5.2%. Most Fed officials now see core inflation ending the year at 4.1% if they raise rates to around 2% this year, according to last week’s projections.

Mr Powell said the outlook for inflation had deteriorated significantly even before Russia’s invasion of Ukraine, and he warned that the effects of war in Europe and the West’s response to sanction heavily on the Russian economy could further aggravate supply chain disruptions while driving up prices for key commodities. raw materials used to manufacture a range of products. In a sign of Mr. Powell’s growing intolerance of inflationary surprises, his speech was titled “Restoring Price Stability”.

In January, the Fed expected inflation to ease this year as supply chain bottlenecks improved. “That story has already fallen apart,” Mr Powell said on Monday. “As it continues to crumble, my colleagues and I may well come to the conclusion that we need to act faster. And if so, we will.

Federal Reserve Chairman Jerome Powell said the central bank would raise interest rates by a quarter of a percentage point from near zero. Powell also announced plans to raise rates steadily this year to help keep inflation in check. Photo: Federal Reserve Board of Governors

Mr Powell compared the potential shock to inflation from a spike in a wide range of commodities, including energy, due to the war in Ukraine with oil price shocks resulting from geopolitical events in the Middle East in the 1970s. That story was “not a happy one” for the Fed because it led to double-digit inflation, Powell said.

Central bank textbooks view the effect of supply shocks on inflation as transitory as long as the public does not expect a permanent rise in future inflation. In the 1970s, expectations were not so stable, and the shocks of 1973 and 1979 fueled broader inflation. But according to consumer surveys and market-based measures, inflation expectations have been relatively stable since the 1990s, mitigating the oil price shocks of 1990 and 2003.

The question is whether 2022 will be more like the shocks of the 1970s or more recent episodes. Ukraine shock looks ‘more like a classic supply shock’ [that] you would tend to want to look through it,” Powell said. But he said the Fed was less inclined to ignore the shock than it otherwise would have been because high inflation risks pushing consumer and business expectations to levels that could create a much more destabilizing psychology. higher prices.

“I wouldn’t say we’re comfortable at all with the typical approach that we’re just going to look through that approach,” Powell said.

The Fed’s task now is to guide inflation lower by raising rates to moderate demand, but not so aggressively that the economy slides into recession. Engineering such a soft landing is always possible, Powell said, and he pointed to three instances in the past 60 years in which he believed the Fed had achieved such an outcome.

But he added several caveats: “No one expects a soft landing to be simple in today’s environment – very little is simple in today’s environment.”

Monetary policy is a “blunt instrument, incapable of surgical precision,” Powell added. “My colleagues and I will do our best to succeed in this difficult task.”

The Fed is still counting on significant help from healing supply chains and getting workers back into the workforce to bring inflation down this year and next. But, Powell said, contrary to the Fed’s stance for much of 2021, it could no longer set policy in expecting such relief to materialize.

“As we set our policy, we will be looking at real progress on these issues and not assuming significant relief on the supply side in the near term,” he said.

Duy said the comments offered the most explicit acknowledgment of how the Fed’s urgency to raise rates has intensified in recent weeks. “They will continue to rise until they see clear evidence that they can roll back their inflationary concerns,” Duy said. “Rather than hoping inflation will go down, they need clear and convincing evidence that inflation is down.”

Mr Powell also for the first time admitted to the possibility that the economy is undergoing a major shift in which many of the forces that have contributed to lower inflation over the past 25 years, including globalization, could s fraying. Globalization has made it much harder for companies to raise prices, he said, and a more segmented global economy could reverse some forces that have kept prices low for decades.

Mr Powell said he had never found these arguments for higher future inflation particularly compelling before the pandemic, but he said it was harder to say how the pandemic, the policy response unusually strong and the war in Ukraine would change the nature of the economy.

“No one is sitting at the Fed…just waiting for the old regime to come back. I think people fully appreciate the situation we’re in,” he said. series of shocks that have happened, and we have a job to do, and we’re very focused on that job.”

Write to Nick Timiraos at [email protected]

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