Fri, May 06, 2022 page10

• US Fed raises interest rates 50 points

  NEUTRAL RATE: Fed officials, who are trying to curb the US’ hottest inflations since the early 1980s, said they want to raise rates until they neither speed nor slow the economy

  • Bloomberg
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  US Federal Reserve Chair Jerome Powell on Wednesday assured Americans that policymakers would do what it takes to curb surging inflation, acknowledging that this could cause “some pain” as the US central bank deployed its most powerful policy tightening in decades.

  The Fed raised interest rates by 50 basis points for the first time since 2000, and Powell said similar moves were on the table for next month and July.

  Still, investors took heart that he also pushed back against a larger 75 basis-point increase, with stocks notching their largest rally on the day of a Fed meeting in a decade.

  

  A trader works, as US Federal Reserve Chair Jerome Powell delivers remarks on screens on the floor of the New York Stock Exchange on Wednesday.

  Photo: Reuters

  European shares rose 1.8 percent at yesterday’s open, following the S&P 500 index’s biggest daily advance since 2020 and a move higher on Asian bourses. Futures on the S&P 500 and NASDAQ 100 slipped, while the US dollar turned higher with US Treasury yields.

  “I’d like to take this opportunity to speak directly to the American people,” Powell told a post-meeting news conference in Washington, held in person for the first time since the COVID-19 pandemic began. “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down.”

  Fed officials — who also decided to start reducing their holdings of Treasuries and mortgage-backed securities next month — are trying to curb the hottest inflation since the early 1980s. Back then, US Federal Reserve chairman Paul Volcker raised rates as high as 20 percent, and crushed inflation and the broader economy in the process.

  The Fed’s hope this time around is that the combination of rising borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation, although Powell implied this might not be possible without hurting growth.

  “Yes, there may be some pain associated with getting back to that,” Powell said. “But the big pain is not dealing with inflation and allowing it to become a contraction.”

  Powell and his colleagues have faced mounting criticism that they were slow to confront inflation, which in March reached a 40-year high of 8.5 percent, based on the US Department of Labor’s consumer price index.

  Powell said that the central bank has been adapting as the data changed, and would continue to do so.

  He said that half-point increases were on the table for the next two policy meetings and suggested that officials could then throttle their hiking pace to quarter-point increases starting in September, provided price pressures showed signs of cooling.

  Fed officials say they want to raise rates until they reach the level that neither speeds up nor slows down the economy — known as the neutral rate.

  He also said that “it is certainly possible” that the Fed decides it would need to move rates to levels that are restrictive for the economy.

  “If higher rates are required then we won’t hesitate to deliver them,” Powell said, although he added that there was a “broad range of plausible levels of neutral,” which officials in March estimated between 2 and 3 percent.

  His wager is that by cooling demand with a steady march to higher interest rates, price increases would be kept in check.

  It is also a risky strategy, and one that might become more dramatic later in the year if inflation does not settle down, Citadel Securities global head of linear rates Michael de Pass said.

  “The Fed is hanging on to the view that the supply-side pressures are transitory,” he said. “The real challenge will be at the end of summer. If inflation is going to remain uncomfortably above target, and their rate is close to neutral, what is their reaction then?”

  Russia’s invasion of Ukraine and ongoing COVID-19-driven lockdowns in China are continuing to affect global supply chains, which the Fed acknowledged in its post-meeting statement.

  Powell said that the Fed does not have the tools to fight supply-side demand, and is instead trying to use its tools to rebalance a too-hot labor market.
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