© . FILE PHOTO: Jerome Powell, chairman of the US Federal Reserve, testifies at the Senate Banking Committee hearing entitled “The Semiannual Monetary Policy Report to the Congress,” in Washington, US, March 3, 2022. Tom Williams/Pool via REUTERS Ann Saphir and Lindsay (NYSE:) Dunsmuir () – Federal Reserve chairman Jerome Powell delivered his most muscular message yet on Monday about his battle with inflation, saying the central bank was “quickly should act to raise interest rates and possibly be more “aggressive” to prevent an upward price spiral from becoming entrenched. In comments that caused financial markets to rush to recalibrate for a greater chance that the Fed would raise interest rates by half a percentage point during one or more of this year’s remaining meetings, Powell signaled an urgency for inflation. challenge from the central bank that was less visible than just a week ago, when the Fed implemented its first rate hike in three years. “The job market is very strong and inflation is way too high,” Powell told a conference of the National Association for Business Economics. “It is clear that swift action is needed to bring the stance of monetary policy back to more neutral levels, and then to more restrictive levels if necessary to restore price stability.” In particular, he added: “If we conclude that it is appropriate to act more aggressively by raising the federal fund rate by more than 25 basis points at a meeting or meetings, we will do so.” Constance Hunter, head of strategy at AIG (NYSE:) called it Powell’s “the buck stops here” speech. U.S. stocks fell and traders — who were already betting on at least a quarter-point rate hike at each of the year’s remaining six Fed meetings — went down in price with a more-than-even chance of a half-point rate hike at each of them. the next two Fed meetings in May and June. That would push the short-term key rate – which has been locked close to zero for two years – to a range of 2.25% to 2.5% by the end of the year, above the 1.9% policy makers of the Fed expected last week. Most Fed policymakers see the “neutral” level somewhere between 2.25% and 2.5%. Powell reiterated on Monday that the Fed’s cuts to its massive balance sheet could begin in May, a process that could further tighten financial conditions. “This isn’t just going to be a short-term tactical phenomenon,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments (NASDAQ:) in New York. “I think this is a more strategic type of messaging from the Fed.” There seems to be a growing consensus for a more aggressive tightening – or at least an openness to it – to grow. Atlanta Fed President Raphael Bostic, who expects a slightly softer path of rate hikes than most of his colleagues, said earlier on Monday that he is open to more-than-usual rate hikes “if that’s what the data suggests is appropriate.” Speaking on Friday, Fed Governor Chris Waller said he would favor a series of half-percentage-point rate hikes to have a faster effect on inflation. SHORT JOB MARKET, INFLATION RISKS The unemployment rate in the US is currently at 3.8% and the number of job openings per person is at an all-time high, a combination that is pushing up wages faster than sustainable. “There is excess demand,” Powell said, adding that “in principle” a less accommodative monetary policy could ease labor market pressures and help stabilize inflation without driving up unemployment, encouraging more of a “soft landing” than a recession would ensue. Inflation according to the Fed’s preferred gauge is three times the central bank’s 2% target, pushed up by snappy supply chains that have taken longer to recover than most expected and could get worse as China responds to new COVID -19 peaks with new lockdowns. In addition to the pressure on prices, the Russian war in Ukraine is pushing up oil prices, pushing inflation up even further. The United States, now the largest oil producer in the world, is now more resilient to an oil shock than it was in the 1970s, Powell noted. While the Fed probably wouldn’t tighten monetary policy in normal times to deal with what could eventually be a temporary spike in commodity prices, Powell said, “the risk is increasing that a prolonged period of high inflation will uncomfortably raise long-term expectations. might push.” Last year, the Fed repeatedly predicted that supply chain pressures would ease and then repeatedly disappointed. “As we set policy, we will look at actual progress on these issues and not assume significant short-term supply-side relief,” Powell said Monday. Policymakers this year began to expect inflation to peak this quarter and cool in the second half of the year. “That story has already fallen apart,” Powell said. “As far as it keeps falling apart, my colleagues and I may come to the conclusion that we need to act faster and if it does, we will.” Fed policymakers hope to curb inflation without curbing growth or driving unemployment back up, and their forecasts released last week suggest they see a way to do that, with a median expectation that inflation will fall in 2024 to 2.3%, but the unemployment rate still at 3.6%. Powell said he expects inflation to fall to “nearly 2%” over the next three years, and that while a “soft landing” may not be easy, there is ample historical precedent. “The economy is very strong and well positioned to handle a tighter monetary policy,” he said, adding that he doesn’t expect a recession this year. It’s a tough trick to refine, analysts said. Powell said “reasonably there is uncertainty,” said Seth Carpenter, chief economist at Morgan Stanley (NYSE:). “If you keep going until you see the result you want, chances are you’ve gone too far.”
