October 3, 2022

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Powell says taming inflation is “absolutely necessary” and a 50 basis point increase is possible in May

Powell says taming inflation is "absolutely necessary" and a 50 basis point increase is possible in May

Federal Reserve Chairman Jerome Powell reiterated the central bank’s determination to bring down inflation and said on Thursday that significant interest rate increases are possible as soon as next month.

“It is appropriate in my view to move a little bit more quickly” to raise interest rates, Powell said while on the IMF committee. “I also think there is something to be said for forward loading wherever one sees fit… I would say 50 basis points will be on the table at the May meeting.”

Powell’s comments are mainly in line with market expectations that the Fed will walk away from its usual 25bp increases and move more quickly to tame inflation that is running at its fastest pace in more than 40 years. A base point is 0.01 percentage point.

However, as Powell spoke, market pricing for raising prices has become somewhat more aggressive.

Expectations for a 50 basis point movement in May rose to 97.6%, according to CME’s FedWatch Tool. Traders also priced in an additional year-end equivalent increase that would raise the federal funds rate, which determines the level of overnight borrowing for banks but is also linked to many consumer debt instruments, to 2.75%.

At its March meeting, the Fed approved a 25 basis point move, but officials in recent days have said that We see the need to move more quickly With consumer inflation at an annual pace of 8.5%.

“Our goal is to use our tools to bring demand and supply back into alignment, so that inflation comes down and does so without a slowdown that amounts to stagnation,” Powell said. “I don’t think you’ll hear anyone at the Fed say it’s going to be straightforward or easy. It’s going to be very difficult. We’re going to do everything we can to make it happen.”

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“It is absolutely necessary to restore price stability,” he added. “Economies do not function without price stability.”

The Fed resisted raising interest rates until 2021 even though inflation was well above the central bank’s long-term target of 2%. under Policy framework adopted in late 2020The Fed said it would be content to let inflation get hotter than usual in order to achieve full employment that includes income, race and gender.

Several months ago, Powell and Federal Reserve officials were insisting that inflation was “temporary” and would dissipate as pandemic-related factors such as supply chain blockages and inflated demand for goods for services recede. However, Powell said that the outlook is “disappointing” and that the Fed should change course.

“This may be the reality [inflation] Its peak was in March, but we don’t know that, so we wouldn’t count on it. “We’re really going to raise rates and quickly get to more neutral levels and then they are really tight… if that’s appropriate once we get there,” he said.

These will be Powell’s last remarks before the May 3-4 FOMC meeting, which sets interest rates. It’s the last Fed official to say Urgent action required to reduce inflation.

Besides raising interest rates, the Fed is expected to soon start reducing the amount of bonds it holds. The central bank’s balance sheet is now nearly $9 trillion, consisting primarily of Treasury bills and mortgage-backed securities.

Discussions at the March meeting finally pointed to the Fed It will generate $95 billion in revenue of bonds due to trade each month.

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Powell noted that other than pernicious inflation, the US economy is “very strong” otherwise. He described the labor market as “historically very narrow.”

Earlier in the day, he referred to former Federal Reserve Chairman Paul Volcker, who tamed inflation in the late 1970s and early 1980s with a series of price increases that eventually led to the recession. Powell said Volcker “knew that in order to tame inflation and heal the economy, he had to stay the course.”

Ultimately, Volcker Fed raised the benchmark interest rate to nearly 20%; It currently falls in the 0.25% to 0.5% range.