The US Federal Reserve began a series of interest rate hikes that could be the most aggressive since the mid-2000s, as Fed chair Jerome Powell said that the US economy is not about to tip into recession.
After raising rates by one-quarter of a point for the first time since 2018 and signaling six more increases this year, Powell told reporters that inflation is too high, the labor market is over-heated and price stability is a “precondition” for the central bank as it tackles the hottest price pressures in 40 years.
“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability, and determined to use our tools to do exactly that,” Powell said on Wednesday following a two-day meeting of the Federal Open Market Committee. “The American economy is very strong and well positioned to handle tighter monetary policy.”
Photo: Bloomberg
Policymakers voted 8 to 1 to lift their key rate to a target range of 0.25 percent to 0.5 percent, after two years of holding borrowing costs near zero to insulate the economy from the COVID-19 pandemic.
They forecast a sequence of rate hikes, finishing this year at 1.9 percent and then to about 2.8 percent by the end of next year, which would be considered restrictive to growth. From June 2004 to June 2006, the Fed moved its benchmark up from 1 percent to 5.25 percent, tightening at 17 straight meetings.
Seven policymakers want an even faster pace of increases this year, which raises the prospect of a half-point move in future. St. Louis Federal Reserve President James Bullard dissented at this meeting in favor of such a step.
“The Fed has now waged a war on inflation,” Grant Thornton chief economist Diane Swonk said. “They want to bring inflation down with the most aggressive surge in rates in decades.”
The Fed said that Russia’s invasion of Ukraine posed “highly uncertain” implications for the economy, which create near-term upward pressure on inflation while weighing on economic activity.
Powell played down the risk of recession and repeatedly stressed that the economy is “very strong” while emphasizing the need for price stability.
In their projections, officials laid out a path of slowing inflation and sustained expansion.
Notwithstanding the projected rate increases, the forecasts showed very little increase in joblessness, which should stay at about 3.5 percent for the next three years.
The US economy roared into the first quarter with employers adding more than 1 million jobs in the first two months, and job openings near a record high.
Strong demand sustained price increases, and consumer inflation rose by 7.9 percent for the 12 months through last month. The Fed’s 2 percent inflation target is based on a separate gauge, the personal consumption expenditures price index, which rose 6.1 percent in January.
Powell and his colleagues have pivoted rapidly from the gradualism of three quarter-point hikes, which they projected in December, to seven, including Wednesday’s increase.
“They saw the light,” Amherst Pierpont Securities chief economist Stephen Stanley said. “They have been underestimating the persistence and intensity of inflation pressures for at least a year. They have finally realized they have a serious problem on their hands and have to act. There is a whatever-it-takes kind of mentality.”
Wednesday’s statement said that price pressures are spreading beyond supply chain problems at a time of wage increases.
Now they are betting a policy tilt toward a series of steady increases could keep inflation expectations anchored, although the war in Ukraine makes the outlook appear to be more murky.
Powell was clear that if inflation does not settle, the policy committee would hammer it even harder.
Despite the rosy outlook for the labor market in the forecasts, Powell said that he thinks it is running too hot.
“There is misalignment of demand and supply, particularly in the labor market, and that is leading to wages that are moving up that are not consistent with 2 percent inflation over time,” Powell said, adding that job openings near record highs point to a labor market that is “tight to an unhealthy level.”
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