The US central bank has to act “quickly” to control inflation that is too high, Federal Reserve Chairman Jerome Powell said on Monday, adding that if necessary, the Fed could carry out rate hikes. higher than normal interest rates.
“The labor market is very strong and inflation is very high,” Powell said in remarks prepared for a conference of the National Association for Business Economics.
“There is an obvious need to act quickly to return the monetary policy stance to a more neutral level and then move to more restrictive levels if that is necessary to restore price stability.”
In particular, he added, “if we conclude that it is appropriate to act more aggressively, raising rates by more than 25 basis points in a meeting or meetings, we will.”
Fed policymakers raised rates last week for the first time in three years and signaled continued rate hikes going forward. Most see the short-term policy rate — fixed close to zero for two years — reaching 1.9% by the end of 2022, a pace that can be achieved with 0.25 percentage point increases in each of the next six meetings.
By the end of 2023, central bank officials expect the interest rate to be at 2.8%, which would drive borrowing costs to a level where they would actually start to hurt growth. Most Fed members see the “neutral” level as somewhere between 2.25% and 2.5%.
Powell also repeated on Monday that the Fed’s massive balance sheet reductions could begin in May.
INFLATION RISKS
Inflation by the central bank’s preferential gauge is at three times the Fed’s 2% target, pressured by supply chain problems that are taking longer to correct than most expected and could worsen as China responds to outbreaks. of Covid-19 with new lockdowns.
Adding even more pressure to prices, Russia’s war in Ukraine is pushing up oil prices, which threatens to push up inflation further. The US, now the world’s biggest producer of the commodity, is better able to weather an oil shock now than it was in the 1970s, Powell said.
While in normal times the Fed would likely not tighten monetary policy to deal with what may ultimately be a temporary spike in commodity prices, Powell said “the risk is rising that a prolonged period of high inflation could push expectations of long term uncomfortably upwards.”
Last year, the central bank repeatedly predicted that supply chain pressures would ease, and then was repeatedly disappointed.
“As we set monetary policy, we will look for real progress on these issues and not assume significant supply-side easing in the short term,” Powell said on Monday.
Fed officials hope to contain inflation without putting pressure on growth or raising unemployment, and their forecasts released last week suggest they see a trajectory for that, with median inflation forecasts falling to 2.3% through 2024, but unemployment still at 3.6%.
Powell said on Monday he expects inflation to decline to “close to 2%” over the next three years and that while a “soft landing” might not be straightforward, there are many historical precedents.
“The economy is very strong and well positioned to deal with tighter monetary policy,” he said.
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