Powell of the Fed vowed to raise interest rates as high as needed to stem the surge in inflation
Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee in Washington, United States, March 3, 2022. Tom Williams/Pool via REUTERS
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WASHINGTON, May 17 (Reuters) – Federal Reserve Chair Jerome Powell on Tuesday pledged that the Federal Reserve will raise interest rates as high as needed to halt a surge in inflation that he says is the bedrock threatened by the economy.
“What we need to see is a clear and convincing fall in inflation, and we’re going to keep pushing until we see that,” Powell told a Wall Street Journal event. “If we don’t see that, we need to consider moving more aggressively” to tighten financial terms.
“Achieving price stability, restoring price stability, is an imperative. Something we have to do because without price stability, the economy doesn’t work for workers, for companies, or for anyone. It really is the bedrock of the economy.”
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Acknowledging the potential “pain” that controlling inflation could cause in the form of slower economic growth or higher unemployment, Powell said there are “ways” to slow the pace of price increases without a full-blown recession.
But if inflation doesn’t fall, Powell said the Fed won’t shy away from raising rates until it does.
“If that means moving beyond commonly understood levels of ‘neutral,’ then we won’t hesitate to do so,” Powell said, referring to the speed at which economic activity is neither being stimulated nor restrained. “We’re going to go until we feel like we’ve gotten to a point where we can say, ‘Yeah, financial conditions are in a suitable place, we’re seeing inflation coming down.'”
The Fed has raised interest rates by three-quarters of a percentage point this year and is on track to raise them again in half-percentage-point increments at its next two meetings in June and July. Market rates on government bonds, 30-year mortgages and other forms of debt have risen much faster in a financial tightening driven by upcoming Fed action.
What happens next — how much more the central bank hikes rates and how quickly — depends on how the economy and inflation fare, something Powell said the Fed would rate “meeting by meeting, data reading by data reading.”
His comments solidified expectations in interest rate futures markets that the Fed’s target rate would reach at least 2.75% to 3.00% and maybe more by the end of this year, rising steadily from the current 0.75% to 1% range. CME Group’s FedWatch tool on Tuesday showed a more than 1 in 4 chance for the federal funds rate to end the year between 3.00% and 3.25%, up from a 1 in 10 chance on Monday.
“Until something breaks”
Economists, meanwhile, are divided between those who believe inflation will collapse on its own and let the Fed do less, and those who believe the central bank may need to increase in increments of three-quarters of a percentage point to ever bring inflation under control to bring some of the shocks of the 1970s and early 1980s.
The data for the past few weeks has been full of conflicting signals.
Retail sales, hiring and manufacturing output all show an economy that has remained unflinching, even in the face of higher borrowing costs. Continue reading
“The economy is strong. Consumer balance sheets are healthy. Companies are healthy,” Powell said, claiming that strength is one of the reasons the Fed can push interest rates higher and slow growth enough to cool inflation without causing the kind of painful contraction the central bank has had in the past prices pushed down.
At the same time, the war in Ukraine is making food and fuel more expensive around the world, while a new round of coronavirus lockdowns in China threatens to push prices of manufactured and manufactured goods further.
This, combined with still strong consumer demand in the United States, could force the Fed to take even tougher action.
The Fed is targeting 2% annual inflation, but prices are currently more than tripling by the central bank’s preferred benchmark. Inflation that is too rapid can distort fiscal and business planning and, more importantly for the sense of urgency that Powell and his Fed colleagues felt, undermine the central bank’s ability to keep them under control.
“Once the Fed starts going up, they keep going up until something breaks. Now the question is what should we consider as a potential break? The stock market? Is it loans? Is it real estate? I think that’s going to be the cycle is a big unknown,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
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Reporting by Howard Schneider and Ann Saphir; Additional reporting by Karen Brettell; Edited by Chizu Nomiyama and Paul Simao
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