Powell opens door to faster hikes, higher rates

Federal Reserve Chairman Jerome Powell on Monday said that the central bank will not hesitate to raise interest rates at a faster than typical pace to curb inflation.

In a Monday speech to the National Association of Business Economists (NABE), Powell opened the door to raising interest rates in 0.5 percentage point increments and setting them at a level meant to restrict the economy.

Powell touted the strength of the U.S. job market and overall recovery from the coronavirus pandemic, expressing confidence that the Fed won’t cost the economy job gains. Even so, Powell made clear the Fed would no longer wait for supply chains to normalize or other shocks to fade to hike interest rates and pull back on stimulus.

“Price stability is essential if we are going to have another sustained period of strong labor market conditions,” Powell said. 

“We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Powell’s comments come one week after the Fed kicked off a series of interest rate hikes meant to cool off inflation that has run much higher and lasted longer than the bank and many economists expected.

Annual inflation as measured by the personal consumption expenditures price index hit 6.1 percent in January, more than three times the Fed’s annual target of 2 percent. 

The Fed slashed interest rates to near zero levels in March 2020 to help stimulate the economy by reducing borrowing costs to encourage lending and investment. The bank is now attempting to raise interest rates to a neutral level — one that does not stimulate or restrain the economy — without harming the long-term prospects for job growth.

The Fed raised its baseline interest rate range by 0.25 percentage points last week and projected doing so at least six more times this year. But several Fed officials have called for raising rates by 0.5 percentage points in the hopes of slowing inflation sooner.

Powell did not say whether he personally thinks a 0.5 percentage point hike will be necessary at the Fed’s next monetary policy meeting in May, but hinted it could be necessary if inflation does not begin to settle down. He added that while the Fed held off on an increase during previous pandemic-driven supply shocks, the bank will not hesitate to hike rates even if the war in Ukraine sends prices higher.

“In normal times, when employment and inflation are close to our objectives, monetary policy would look through a brief burst of inflation associated with commodity price shocks,” Powell said.

“However, the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously as I have described.”