Jay Powell, chairman of the Federal Reserve, refused on Wednesday to rule out a more aggressive series of interest rate hikes than markets had been expecting, while all but confirmed that the first will be implemented in March.
Powell avoided a question about whether the Fed will be able to raise rates at each subsequent meeting this year — which would represent seven hikes in 2022 — saying instead that the central bank will be “humble and wise” and “data-driven”.
Last month, central bank policymakers released projections that implied just three increases this year.
Powell’s assertive stance at a news conference after the Fed’s January meeting prompted a sharp sell-off in the stock market. The S&P 500 index missed a 2.2% gain, closing 0.1% lower. The Nasdaq composite tech stock index closed flat, reversing a rise of up to 3.4% in early trading.
The two-year Treasury bond yield, which moves with interest rate expectations, rose to 1.16% — its highest level since February 2020.
Powell said the economy was much stronger today than it was in 2015, when the central bank last embarked on a cycle of interest rate hikes, noting that the rise in inflation is “well above” the 2% target for the year. Fed and the job market is tight.
“These differences are likely to have important implications for policy adjustment at an appropriate pace,” he said.
“I think there is a lot of room to raise the rate without threatening the job market,” he added.
Powell also declined to say whether the Fed will consider a 0.5 percentage point rate hike sometime this year, as opposed to the 0.25 point hikes that have become the norm. It’s been more than two decades since the central bank last raised the rate by more than 0.25%.
He pointed out that policymakers have yet to “make those decisions”, but again pointed to the strength of the economy. “If you look at… 2015, 16, 17, 18, when we were raising rates, inflation was very close to 2%, even below,” he said, also referring to low unemployment and strong growth. of American GDP.
Eric Winograd, Senior Economist at AllianceBernstein, said: “Powell didn’t rule out the idea of ​​raising every meeting rather than every once in a while. He didn’t rule out the idea of ​​a 50 basis point hike. The stock market reacted well when Powell said the labor market is strong enough to support several rate hikes”.
Winograd described the Fed meeting as “very aggressive” and added: “They did everything they could except hire a plane to write the message in the sky.”
Meanwhile, Powell basically confirmed that the cycle of rate hikes will begin in March. “The committee has in mind raising the federal funds rate at the March meeting, assuming conditions are right,” he said.
The central bank had pledged to keep its key policy rate at ultra-low levels — where it has been since the start of the pandemic — until it reaches full employment and an average inflation of 2% over time. The inflation target was met last year, and the Fed commented on Wednesday that the unemployment rate, which now hovers just below 4%, has declined “substantially”.
“I would say that most FOMC (Federal Open Market Committee of the Federal Reserve) participants agree that labor market conditions are consistent with full employment … and that’s my personal opinion,” Powell said.
The Fed also confirmed that it will roll back its bond-buying program so the acquisitions finish in early March.
Fomc and the bank’s other regional presidents last month calculated three 25-point increases in 2022, with another three in 2023 and two more in 2024.
However, in recent weeks some Fed officials and Wall Street economists have said a more aggressive rate-adjusting cycle may be needed, with four or more hikes this year. Powell did little to dismiss those views on Wednesday.
Dealers in the overnight fund markets, which were pricing in a 25-point rate hike in March, have started to raise their expectations that the Fed could raise rates more than four times this year.
There is also talk of how the Fed will shrink its balance sheet by approximately $9 trillion, after policymakers held the first substantial discussions on central bank assets last month. They had further deliberations at this week’s meeting and released a set of principles on the approach to reducing balance sheet size.
Translated by Luiz Roberto M. Gonçalves
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