US Federal Reserve Chairman Jerome Powell, in his most hawkish remarks to date, said that the US central bank would keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat.
“What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,” Powell said on Tuesday during a Wall Street Journal live event. “If that involves moving past broadly understood levels of ‘neutral,’ we won’t hesitate at all to do that.”
The Fed chair repeatedly stressed the need to curb the hottest inflation in decades during the roughly 35-minute interview, calling price stability “the bedrock of the economy” and acknowledging that some pain in achieving this, including a slight rise in the unemployment rate, was a cost worth paying to achieve it.
Photo: Reuters
Powell and his colleagues on the central bank’s Federal Open Market Committee (FOMC) voted to raise their benchmark rate by 0.5 percentage points at a policy meeting earlier this month, and the chair at the time suggested to reporters that hikes of similar magnitudes would be on the table at their meetings next month and in July.
Powell repeated that guidance on Tuesday, while adding that near-term inflation developments would be a critical determinant of the size of coming moves.
If the Fed does not see clear and convincing evidence of abating inflationary pressures, “then we’ll have to consider moving more aggressively,” Powell said. “If we do see that, then we can consider moving to a slower pace.”
The target range for the benchmark federal funds rate currently stands at 0.75 to 1 percent. The committee next meets on June 14 and 15.
Domestic demand remains robust even as financial conditions have tightened following comments in the past few weeks from a number of Fed officials who have said that they want to raise rates to “neutral” levels by the end of the year, which they judge to be about 2.5 percent.
However, Powell cautioned that higher rates could eventually start to have a bigger effect on growth.
“This is a strong economy and we think it’s well positioned to withstand less accommodative monetary policy, tighter monetary policy,” Powell said. “There could be some pain involved to restoring price stability, but we think we can maintain a strong labor market.”
The S&P 500 is down about 15 percent from the record high achieved in early January, while yields on government 10-year notes stand at 2.99 percent, up from 1.5 percent at the start of the year.
The rise in longer-term yields is pushing up borrowing costs for housing, one of the most interest-rate sensitive sectors of the economy that the Fed would like to see cool to help curb price pressures.
The rate on a 30-year fixed-rate mortgage last week was above 5.4 percent, up slightly more than 2 percentage points from the start of the year, the national average tracked by Bankrate.com showed.
Powell said that the reaction in financial markets showed that investors were getting the Fed’s message.
“Of course, volatility has been up a little bit, and that has some effect on liquidity in some markets, but nonetheless, the markets are orderly, they’re functioning,” Powell said.
“I think they’re processing the way we’re thinking — the way the FOMC is thinking — about policy pretty well,” he said. “And I think that the idea, again, is to have financial conditions tighten to the point where growth will moderate.”
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