Federal Reserve May Be More Aggressive in Reducing Inflation

New York, NY, March 22, 2022-Federal Reserve Chairman Jerome Powell said the central bank was prepared to raise interest rates in half-percentage-point steps and high enough to deliberately slow the economy if it concluded such steps were warranted to bring down inflation, reports the Wall Street Journal.

“‘If we think it’s appropriate to raise [by a half point] at a meeting or meetings, we will do so,’ Mr. Powell said during a moderated discussion after a speech on Monday before the National Association for Business Economics in Washington, D.C.

“Mr. Powell’s remarks struck a tougher tone than he used just days earlier in a press conference after the Fed voted to raise its benchmark rate by a quarter point, and he signaled a stronger bias toward lifting rates until the central bank sees clear evidence that inflation is falling to its 2% target.

“The Fed lifted the rate from near zero to a range between 0.25% and 0.5% last week, and officials penciled in a series of additional increases raising it to slightly below 2% at the end of this year and to around 2.75% next year.

“Mr. Powell repeatedly stressed the uncertainty facing Fed officials as they navigate the aftereffects of the Covid-19 pandemic and the recent war in Ukraine, and he said they are ready to shift their policy in a more disruptive direction.

“‘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,’ said Mr. Powell. Most Fed officials believe a neutral rate is near 2.5%, assuming annual inflation is 2%.

“Stocks and bonds fell as Mr. Powell spoke. The Dow Jones Industrial Average closed down 0.58% on Monday. The yield on the benchmark 10-year Treasury note rose to 2.298% in afternoon trading, as yields rise when bond prices fall.

“‘Powell really stepped out here and detailed a lot of serious concerns about inflation in the context of a job market that is arguably overheating,’ said Tim Duy, chief economist at research firm SGH Macro Advisors. Compared with Mr. Powell’s press conference last week, at which he was speaking on behalf of the central bank’s rate-setting committee, ‘this was even more explicit, and probably more reflective of his own views.’

“Some critics say the Fed is being forced to aggressively raise interest rates now because officials waited too long last year to withdraw stimulus. At last week’s Fed meeting, St. Louis Fed President James Bullard dissented from the policy decision in favor of a larger half-point increase and pointed to the potential for higher inflation to lead inflation-adjusted interest rates to decline, even as the Fed raises nominal interest rates.

“‘The committee will have to move quickly to address this situation or risk losing credibility on its inflation target,’ he said in a statement last week explaining his decision.”