Powell: Fed could raise rates more quickly
Jerome Powell, the Federal Reserve chair, said Monday that the central bank was prepared to more quickly withdraw support from the economy if doing so proved necessary to bring rapid inflation under control.
Powell signaled that the Fed could make big interest rate increases and push rates to relatively high levels in its quest to cool off demand and temper inflation, which is running at its fastest pace in 40 years. His comments were the clearest statement yet that the central bank was ready to forcefully attack rapid price increases to make sure that they do not become a permanent feature of the U.S. economy.
“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability,” Powell said during remarks to a conference of business economists.
Policymakers raised interest rates by a quarterpoint last week and forecast six more similarly sized increases this year. On Monday, Powell foreshadowed a potentially more aggressive path. A restrictive ratesetting would squeeze the economy, slowing consumer spending and the labor market — a move akin to the Fed’s hitting the brakes rather than just taking its foot off the accelerator.
“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said. “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”
Asked what would keep the Fed from raising interest rates by half a percentage point at its next meeting in May, Powell replied, “Nothing.” He said the Fed had not yet made a decision on its next rate increase but noted that officials would make a supersized move if they thought one was appropriate.
“The expectation going into this year was that we would basically see inflation peaking in the first quarter, then maybe leveling out,” Powell said. “That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly.”
Stocks fell in response to Powell’s comments and were down 0.6% by the time he finished speaking in the early afternoon. Higher interest rates can push down stock prices as they pull money away from riskier assets — like shares in companies — and toward safer havens, like bonds, and as they make money more expensive to borrow for businesses. The yield on the benchmark 10-year Treasury note rose as high as 2.3% as Powell was speaking, and the yield on twoyear Treasurys rose above 2% for the first time since 2019.
Rising rates can especially hurt share prices if they tank economic growth or cause the economy to contract.
While the Fed has often caused recessions by raising interest rates in a bid to slow down demand and cool off price increases, Powell voiced optimism that the central bank could avoid such an outcome this time, in part because the economy is starting from a strong place. Even so, he acknowledged that guiding inflation down without severely hurting the economy would be a challenge.
“No one expects that bringing about a soft landing will be straightforward in the current context,” Powell said.
But getting price gains under control is the Fed’s priority, and while the central bank had been hoping for inflation to fade as pandemic disruptions abate, Powell was adamant that it could no longer watch and wait for that to happen.
In addition to raising rates, the Fed plans to reduce its large bond holdings by allowing securities to expire, which would push up longer-term borrowing costs, including mortgage rates, helping to take steam out of the economy. Powell emphasized that the balance-sheet shrinking could begin imminently.
The Fed is preparing to pull back support even as Russia’s invasion of Ukraine stokes economic uncertainty.
The conflict has pushed energy prices higher, something that the Fed would typically discount, since it is likely to fade eventually. However, Powell said it could not ignore the increase when inflation was already high.