US Federal Reserve Chair Jerome Powell outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half-percentage-point interest rate increases while describing the labor market as overheated.
“I would say that 50 basis points will be on the table for the May meeting,” Powell said at an IMF-hosted panel on Thursday in Washington, also attended by European Central Bank President Christine Lagarde and other officials.
He said demand for workers is “too hot — you know, it is unsustainably hot.”
Photo: Reuters
The Fed chief is taking direct aim at strong demand that the central bank wants to cool. It is a strategy that bears considerable risk for US workers and the economy’s overall growth prospects in months ahead, as well as for the Fed itself in a year of midterm congressional elections, with inflation a major concern among the US public.
“This is going to be a very close call on whether we get a recession or not,” Bank of America Securities head of global economics Ethan Harris said. “They have to get monetary policy into tight territory, and they probably need to get some kind of rise in the [employment] rate.”
Powell also reinforced expectations for another half-point increase in June, by citing minutes from last month’s policy meeting, which said many officials had noted “one or more” 50 basis-point hikes could be appropriate to curb the hottest inflation in four decades.
“There’s something in the idea of front-end loading” moves if appropriate, Powell said. “So that points in the direction of 50 basis points being on the table.”
Investors are betting on half-point increases in May, June and possibly July. Rising yields in turn have unsettled the stock market, with the S&P 500 Index closing down 1.5 percent on Thursday.
US Federal Reserve Bank of St Louis President James Bullard has also opened a debate about doing a more aggressive 75 basis-point increase if needed, while even normally dovish officials such as San Francisco Federal Reserve President Mary Daly have said that a “couple” of half-point moves are likely.
Powell “approved a 50 basis point hike in May, but I think June is also there and maybe even more,” Bloomberg Economics senior US economist Yelena Shulyatyeva said.
To some, it is too little, too late. Critics have said that US central bankers are caught in a policy bind of their own making. Prices began to accelerate in the fourth quarter, when employers shrugged at the latest wave of COVID-19 and added more than a half-million workers each month.
Wage gains picked up and demand increased, broadening inflation pressures throughout the economy even as the Fed continued to add stimulus by holding rates near zero while buying bonds.
Policymakers last year wanted to avoid pre-emptive tightening, but the combination of fiscal stimulus, monetary support and demand bounce-back put them behind inflation pressures that were well underway.
The consumer price index rose 8.5 percent last month from one year earlier, the most since 1981. The Fed’s target is based on a separate measure known as the personal consumption expenditures price index, which rose 6.4 percent for the year through February.
The Ukraine war is likely to raise food and energy prices further.
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