Chair Jerome Powell said Monday that the Federal Reserve will raise its benchmark short-term interest rate faster than expected and is high enough to prevent growth and hiring, if it decides it will be necessary to slow down inflation.
WASHINGTON – Chair Jerome Powell said Monday that the Federal Reserve will raise its benchmark short-term interest rate faster than expected, and is high enough to stem growth and recruitment, if it decides it will be necessary to slow sharp inflation.
At their meeting last week, Fed officials raised their key rate from near zero to 0.25% to 0.5% and predicted that they would raise six more quarterly points this year.
Powell said that if necessary, the Fed would be open to raising rates by more aggressive half-points in multiple meetings and pushing rates into “prohibitive” areas that would limit growth. The Fed has not raised its benchmark rate by half a point since May 2000.
“We will take the necessary steps to restore price stability,” he said in a speech at an economic conference. “In particular, if we conclude that it is appropriate to raise the federal funds rate more aggressively than in a meeting or meeting (a quarter-point), we will do so.”
The Fed is under pressure from widespread criticism that it has reacted too slowly to pushing inflation to four-decade highs. At their meeting last week, Fed officials predicted they would raise rates an additional four times in 2023 and that inflation would slow to 2.7% by the end of that year.
At the same time, policymakers predicted that the economy would be resilient enough to keep growing and that the unemployment rate would drop from its current level of 3.8% to 3.5%, which had reached a 50-year low before the epidemic.
Some economists argue that such a painful outcome – which they refer to as a “soft landing” – is unrealistic, given the challenges that the economy faces, including the possibility of a deep economic catastrophe as a result of Russia’s invasion of Ukraine. The war has already pushed up the prices of oil, wheat, nickel and other essential commodities.
But Powell insisted the Fed had achieved such a soft landing before.
“I believe that the historical record provides some basis for optimism,” he said. “Soft, or at least soft-ish, landings have been relatively common in American financial history.”
Powell’s remarks follow a flurry of comments from Fed policy officials from last week’s meeting, all pointing in a stylish direction. (“Hawks” generally support higher interest rates to curb inflation, while “doves” generally prefer lower rates for hiring).
Also Monday, Federal Reserve Bank of Atlanta President Rafael Bostick said controlling inflation was “my top concern for 2022.”
Bostick added that he expects the Fed to raise rates a total of six times this year, and twice more in 2023. This is a more devout approach than most of his colleagues. He emphasized, however, that this was largely due to the current uncertainty surrounding the economy. If further rate hikes are needed to reduce inflation, he will support them, he said.
“We have been in a state of emergency for a long time,” Bostic said. “It simply came to our notice then. We need to be neutral quickly, ”he said, referring to a level of interest rates that does not encourage or slow down economic growth.