Wed, Mar 23, 2022 page10

• Powell ready to back half-point hike

  ‘MOVE MORE QUICKLY’: Fed Chair Jerome Powell said that half-point interest rate hikes might be discussed when US policymakers next meet in May and afterward

  • Bloomberg
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  US Federal Reserve Chair Jerome Powell said the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, deploying a more aggressive tone toward curbing inflation than he used just a few days earlier.

  Policymakers raised the benchmark lending rate by a quarter point at their meeting on Wednesday last week — ending two years of near-zero borrowing costs — and signaled six more hikes of that magnitude this year, based on the median projection.

  Powell said that half-point hikes might be an option when policymakers next gather on May 3 and 4, and at subsequent sessions.

  

  US Federal Reserve Chairman Jerome Powell speaks during the National Association of Business Economics economic policy conference in Washington DC on Monday.

  Photo: Valerie Plesch, Bloomberg

  “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 in a speech titled “Restoring Price Stability” to the National Association for Business Economics on Monday.

  Following his formal remarks, Powell was asked by the moderator if there was anything stopping policymakers from hiking by a half point in May, which would be the first increase of that magnitude since 2000.

  “What would prevent us? Nothing: Executive summary,” he said, drawing laughs from the audience.

  He said that such a decision had not been made, but added that it was possible if warranted by incoming data.

  “My colleagues and I may well reach the conclusion that we’ll need to move more quickly and if so we will do so,” he said.

  Powell was more hawkish on Monday than at the news conference following last week’s meeting, indicating that if inflation continues to run hot he would favor a more aggressive pace of tightening.

  Last week, he had to speak for the range of views among the 16 policymakers on the US Federal Open Market Committee.

  Markets heard the chair’s message and moved sharply in response, sending US Treasury yields spiking higher as investors increased bets that the Fed will raise interest rates by a half-point in May to confront the hottest inflation in 40 years.

  Goldman Sachs Group Inc economists led by Jan Hatzius saw the comments as a hawkish signal and now expect the Fed to raise interest rates by 50 basis points at its May and June policy meetings, followed by four 25 basis point increases in the second half of the year.

  The Fed’s policy rate is anticipated to reach 2.8 percent next year, beyond the so-called neutral rate of about 2.4 percent that neither speeds up nor slows down economic activity.

  “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,” Powell said.

  The Fed chair — who reiterated and elaborated on many of his key comments from last week’s news conference — said Russia’s invasion of Ukraine is aggravating inflation pressures by boosting prices on food, energy and other commodities “at a time of already too high inflation.”

  He said central banks typically look through event-driven commodity price shocks, but this time would not necessarily be typical.

  “The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously as I have described,” he said.

  The comments suggest that Powell sees even higher inflation as a greater risk to the economy than any near-term slowdown resulting from consumption due to fuel costs and rising uncertainty.

  Powell described the US economy as “very strong” and well-positioned to handle higher interest rates.

  Fed officials last week forecast economic growth of 2.8 percent this year, but Russia’s invasion of Ukraine has thrown new risk into their outlook.

  Discussions on when and how quickly to start winding down their US$8.9 trillion balance sheet are still ongoing, policymakers have said, but a decision is expected soon.

  On that topic, Powell reiterated a comment from last week’s news conference, saying that action to reduce the balance sheet “could come as soon as our next meeting in May, though that is not a decision that we have made.”

  The Fed chair said policymakers are no longer assuming significant relief on supply-chain issues and would be looking for “actual progress” on inflation to guide interest rate decisions.

  Despite the aggressive tone of Powell’s remarks, he said he remained optimistic about soft landing the economy to some sustainable growth rate.

  “Soft, or at least softish, landings have been relatively common in US monetary history,” he said. “I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context.”
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