Jay Powell says Fed should act ‘quickly’ to tighten policy

Jay Powell said the Federal Reserve needed to tighten monetary policy “quickly” to bring down excessive inflation and expressed confidence the Federal Reserve could do so without triggering a recession.

Speaking at a conference hosted by the National Association for Business Economics on Monday, the Fed chair laid out the case for a series of rate hikes this year and substantial moves to shake up the central bank’s $9 trillion balance sheet US dollar to shrink as it faces a job market “extremely tight” and inflation “way too high”.

“There is an obvious need to act quickly to return monetary policy stance to more neutral levels and then move to more hawkish levels when needed to restore price stability,” he said.

The “neutral” interest rate is one that neither supports nor hinders growth, and most policymakers believe that to be around 2.4 percent.

Powell’s comments come just days after the Fed delivered its first rate hike since 2018, which is expected to be the first of many The rate will increase this year and into 2023.

A majority of central bank officials signaled last week that the benchmark interest rate would rise to 1.9 percent by the end of the year, from the current range of 0.25 percent to 0.50 percent. Getting there would require a six-quarter-point raise at each of the remaining Federal Open Market Committee meetings this year.

The so-called “dot plot” of interest rate projections by individual policymakers showed that seven out of 16 officials expected interest rates to rise above 2 percent in 2022, suggesting at least one of the adjustments this year will be half a point. Most officials predicted rates would rise to 2.8 percent in 2023.

Powell said Monday that despite a sharp escalation in geopolitical tensions surrounding Russia’s invasion of Ukraine, a “significant strengthening of political stance” was needed. The war is expected to “push up prices for energy, food and commodities in the short term” at a time of “already too high inflation”.

“The risk is increasing that a prolonged period of high inflation could uncomfortably raise longer-term expectations, underscoring the need for the committee to act swiftly, as I have outlined,” he said.

Powell’s challenge this year will be to build consensus among committee members on how quickly monetary policy needs to be tightened to bring inflation in line with the Fed’s 2 percent target.

Officials last week raised the median estimate for core inflation this year to 4.1 percent from 2.7 percent in December. Their forecasts for the funds rate this year ranged from 1.4 percent to 3.1 percent.

Atlanta Fed President Raphael Bostic said Monday he supports just five more rate hikes this year, which would take the federal funds rate to about 1.63 percent. He pushed back the idea that the Fed would have to “actively slow the economy” to bring inflation back under control by raising interest rates above neutral.

Bostic’s views stand in stark contrast to those of St. Louis Fed President James Bullard, who said Friday he supports the fed funds rate, which will rise more than 3 percent this year.

Bullard objected from the committee’s decision to raise the benchmark interest rate by just a quarter of a point last week, favoring a half-point move instead.

Bullard was joined on Friday by Christopher Waller, a Fed governor who has advocated “frontloading” rate hikes this year, with rate hikes a half-point “at one or more meetings in the near future.” He supports interest rates between 2 percent and 2.25 percent through the end of the year and that the Fed will soon start shrinking its $9 trillion balance sheet.

Powell on Monday pushed back concerns that future monetary tightening would cause a recession, citing episodes in 1965, 1984 and 1994 when the Fed slowed an overheated economy without triggering a sharp contraction.

“I hasten to add that nobody expects that bringing about a soft landing will be easy in the current context – very little is easy in the current context,” he warned. “And monetary policy is often described as a blunt instrument, incapable of surgical precision.” Jay Powell says Fed should act ‘quickly’ to tighten policy

Adam Bradshaw

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