Fed Chairman Powell calls faster pace of rate hike ‘appropriate’

Jerome H. Powell, chairman of the Federal Reserve, signaled on Thursday that the central bank is ready to raise interest rates quickly from May as it tries to cool the economy and stave off inflation. fast to become a lasting feature.

“We are really committed to using our tools to get inflation back to 2%,” Powell said, speaking at an International Monetary Fund panel on the global economy alongside the Bank’s president. central European, Christine Lagarde, and other political decision-makers.

The Fed is raising borrowing costs in order to cool consumer demand and slow the economy when it risks overheating. Given the speed of inflation and the current low interest rates, “it’s appropriate, in my view, to move a little faster” in this process, Powell said.

A larger-than-usual interest rate hike of half a percentage point “will be on the table for the May meeting,” he added.

The Fed Chairman’s comments come at a difficult time for the United States and the global economy. Growth has rebounded strongly since the start of the pandemic, but that progress has been accompanied by rapid and stubborn inflation in America and other advanced economies.

As prices rise at a rate not seen in decades, Russia’s 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 trigger recessions in several Eastern European economies this year and deteriorate the broader global economic outlook.

As US policymakers watch the risks to growth, they are even more concerned about the impact of the war on inflation from a domestic economic perspective. The US consumer price index for March showed prices rose 8.5%, the fastest pace since 1981, as oil prices rose amid the dispute, rents continued to climb and that a range of goods and services were becoming more expensive.

The magnitude and persistence of high inflation in the United States unsettled Mr. Powell and his colleagues. While they had initially hoped that the rapid price increases would fade as the economy returned to some version of normal, they began raising interest rates in March as they tried to prevent high inflation to become more permanent.

Even since that meeting last month, officials and markets have come to anticipate a much faster pace of Fed action to slow the economy. In March, Fed officials projected they would deliver rate hikes of seven quarter-points in 2022; Even officials who have long called for low rates are now suggesting that nine would probably be appropriate.

To accommodate these many increases, the Fed will have to raise interest rates by half a point at some of its meetings. On Thursday morning, investors expected Fed officials to raise interest rates by half a percentage point at their next meeting on May 3-4, and by at least that much at their next meeting. next two meetings, so that interest rates would rise from less than 0.5 percent now to more than 2 percent in July.

By the end of the year, market prices suggest rates will approach 3%, a high they haven’t seen since before the 2008 financial crisis.

Fed officials plan to couple their interest rate hikes with a plan to shrink their balance sheet, which has been inflated by pandemic-era bond purchases intended to soothe the economy. Reducing these holdings will drive up long-term interest rates and further slow the economy. A plan for the balance sheet could come in May and begin in June, officials said.

The withdrawal of policy support from the U.S. central bank comes as rapid wage gains, rapidly rising housing costs and growing price pressures in service industries combine with global supply disruptions to paint a risky inflation outlook picture. Officials have become more confident that price gains will not fade unless they actively slow the economy to bring them under control.

This has prompted a growing number of policymakers to call for policy rates that are not only ready to react if necessary, but high enough to really weigh on economic activity.

“There’s more alignment on the monetary policy stance toward a neutral, slightly tight 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.”

A key question is whether the Fed will be able to cool the economy and control inflation without tipping the US economy into a recession, which is driving up unemployment and wiping out some of the gains from the shutdowns. pandemic.

Fed officials, including Mr. Powell, have acknowledged that finding that balance — while possible — could be difficult.

“That’s our goal,” Powell said of a soft landing, while noting that no one at the Fed would pretend it would be easy to achieve.

“I don’t think you’re going to hear anyone at the Fed say it’s going to be easy or simple,” Powell said. “It will be very difficult. We will do our best to achieve this. »

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