Powell says the Fed will consider larger rate hikes to reduce inflation

Mr. Powell’s remarks were tougher than what he used just days ago at a news conference after the Fed vote To raise the reference interest rate by a quarter point, and indicated a stronger bias toward raising interest rates until the central bank sees clear evidence that inflation is falling to its 2% target.

The Federal Reserve raised the rate from near zero to a range between 0.25% and 0.5% last week, and officials announced in a series of additional increases that it has raised it to just under 2% at the end of this year and to about 2.75% next year.

Mr. Powell has repeatedly emphasized the uncertainty facing Federal Reserve officials as they navigate the after- and recent effects of the Covid-19 pandemic. war in ukrainehe said they are ready to change their policy in a more turbulent direction.

“If we decide that we need to tighten beyond joint measures of neutrality and into a more restrictive stance, we will as well,” Mr. Powell said. Most Fed officials believe the neutral rate is closer to 2.5%, assuming annual inflation is 2%.

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

“Powell is really out here and has detailed a lot of serious concerns about inflation in the context of an arguably overheated labor market,” said Tim Doe, chief economist at research firm SGH Macro Advisors. Compared to Powell’s press conference last week, in which he was speaking on behalf of the central bank’s rate-setting committee, “this was more explicit, and perhaps more reflective of his views.”

The annual inflation rate rose to 6.1%. In January, on the Fed’s preferred metric, according to the most recent data available. Core inflation, which does not include food and energy, rose to 5.2%. Most Fed officials now see that core inflation will end the year at 4.1% if they raise interest rates to around 2% this year, according to forecasts last week.

Mr. Powell said inflation expectations had deteriorated dramatically even before the Russian invasion of Ukraine, and warned that the effects of the war in Europe and the West’s reaction To impose severe sanctions on the Russian economy It can exacerbate supply chain disruptions while driving up prices for basic commodities used to make a range of commodities. As evidence of Powell’s growing intolerance for inflationary surprises, his speech was titled “Restoring Price Stability.”

In January, the Fed forecast lower inflation this year as supply chain bottlenecks improve. “That story really fell apart,” Powell said Monday. “To the extent that the breakdown continues, my colleagues and I may come to a conclusion that we will need to move more quickly. And if that is the case, we will.”

Mr. Powell compared the potential inflation shock from a spike in a wide range of commodities, including energy, caused by the Ukraine war with the oil price shocks from geopolitical events in the Middle East in the 1970s. Powell said that date was “not happy” for the Federal Reserve, as it led to double-digit inflation.

Central bank textbooks see the effect of supply shocks on inflation as temporary as long as the public does not expect permanently higher future inflation. In the 1970s, expectations were not stable, and the shocks of 1973 and 1979 led to broader inflation. But according to consumer surveys and market-based measures, inflation expectations have been relatively stable since the 1990s, unwinding from the oil shocks of 1990 and 2003.

The question is whether 2022 will be more like the shocks of the 1970s or more recent episodes. Shock in Ukraine ‘more like classic show shock [that] Mr. Powell said. But he said the Fed was less inclined to ignore the shock than it would have otherwise because high inflation threatens consumer and business expectations of rising to levels that could create a much more destabilizing psychology than price hikes.

“I wouldn’t say we’re at all comfortable with the model approach that we’ll look at just with that approach,” Powell said.

The Fed’s job now is to steer inflation down by raising interest rates to moderate demand but not so hard that the economy slips into recession. Powell said that engineering such a so-called easy landing is still possible, and he cited three cases over the past 60 years in which he believed the Fed had achieved such an outcome.

But he added several caveats: “No one expects it to be a simple smooth landing in the current context – too little is evident in the current context.”

Mr. Powell added that monetary policy is “a blunt instrument, not capable of surgical precision”. “My colleagues and I will do everything in our power to succeed in this difficult task.”

The Fed is still counting on significant help from supply chain tackling and the return of workers to the labor market to bring down inflation this year and next. But, said Mr. Powell, unlike The Fed’s position through most of 2021It can no longer set policy by predicting that such relief will come.

“As we set policy, we will look to make actual progress on these issues and not assume significant supply-side easing in the near term,” he said.

Doi said these comments provided the most visible acknowledgment of how the Fed’s urgency to raise interest rates has intensified in recent weeks. “They will continue to rise until they see clear evidence that they can undo their inflationary fears,” said Mr. Doy. “Instead of hoping that inflation will fall, they need clear and convincing evidence that inflation is declining.”

Mr. Powell also allowed for the first time the possibility that the economy is undergoing a major transformation in which many of the forces that have contributed to lowering inflation over the past 25 years, including globalization, may be fading away. He said that globalization has made it difficult for companies to raise prices A more fragmented global economy It may reflect some of the forces that have kept prices low in recent decades.

Mr. Powell said he had never found these arguments in favor of higher inflation in the future particularly compelling before the pandemic, but said it had been difficult to see how the pandemic, the unusually strong political response and the war in Ukraine could change the nature of the economy.

“Nobody is sitting at the Fed…just waiting for the old system to come back. I think people fully appreciate the situation we are in,” he said. “It’s a series of shocks that’s happened, we have a job to do, and we’re very focused on doing that work.”

write to Nick Timiraos at [email protected]