Powell reinforces expectations of a big rate hike next month


FILE – Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing, Thursday, March 3, 2022, on Capitol Hill in Washington. Powell said on Wednesday (March 23) that new forms of digital currency such as cryptocurrencies and stablecoins pose risks to financial systems and will require new rules to protect consumers. (Tom Williams, Pool via AP, File)


The Federal Reserve must act faster than in the past to contain high inflation, Chairman Jerome Powell said Thursday, signaling that sharp interest rate hikes are likely in the coming months, starting with the next policy meeting. from the Fed in May.

In a panel discussion hosted by the International Monetary Fund at its Spring Meetings, Powell also suggested that “there is something about the idea of ​​preloading” aggressive rate hikes as the Fed grapples. with inflation hitting a four-decade high.

“So that’s going in the direction of (a half-point rate hike) being on the table” for the Fed’s May 3-4 policy meeting, Powell said. Typically, in the past, the Fed has raised its benchmark short-term rate. When the Fed raises its rate, it often results in higher borrowing costs for individuals and businesses, including those looking to borrow to buy homes, cars and other expensive goods.

Wall Street investors are already expecting the Fed to raise its key rate by half a point at its next three meetings, including those in June and July. Powell’s comments on Thursday underscored those expectations. It would be the fastest tightening since 1994, when the Fed raised its rate by 1.25 percentage points in three meetings.

Powell’s comments caused stocks to shed early gains and sell off in the afternoon, with the S&P 500 falling 1.5% at the close of trading.

Last month, the Fed made its first rate hike in more than three years, raising its target rate to a range of 0.25% to 0.5%. Expectations of big rate hikes rose rapidly, reflecting the steady surge in inflation. As recently as December, Fed officials had forecast just three quarter-point rate hikes this year.

Fed officials had hoped that inflation would fall mostly on its own as supply chains collapsed and shortages of items like semiconductors unraveled, but those “expectations have disappointed “Powell said.

In contrast, Christine Lagarde, President of the European Central Bank, who participated in Thursday’s discussion, sounded a much more cautious note. Inflation in the 19 countries that use the euro hit 7.5% last month, compared with a year earlier, the highest level since records began in 1997.

Yet the European economy is more threatened by the Russian invasion of Ukraine, which has pushed up food and especially energy prices on the continent and weighed more on its economic growth than in the States. -United.

Lagarde said the ECB, at its next meeting in June, would decide when to end its program of bond purchases, which aim to drive down long-term interest rates. The Fed completed a similar effort in March. The ECB set the July-September quarter as a target to stop buying bonds, but was not more specific.

One reason for Lagarde’s caution, she said, is that about half of inflation in Europe is due to high energy prices. In general, interest rate policies cannot do much against these supply shocks.

“Our economies are moving at a different pace,” Lagarde said, referring to Europe and the United States, where growth has been faster. “Our inflation is fueled by different components.”

In his remarks, Powell said the Fed wants to “quickly” raise its benchmark rate to a neutral level, that is, a level that neither encourages nor hinders economic growth. Fed officials now consider a rate between 2.25% and 2.5% to be about neutral. This is 2 percentage points above its current level.

The Fed could raise rates past neutral, Powell said, to a level that would slow the economy — “if appropriate” to stem high inflation.

How quickly the Fed should raise rates to a point where they begin to constrain the economy could be a matter of debate among policymakers in the months ahead. On Wednesday, Charles Evans, president of the Federal Reserve Bank of Chicago, said rates “will likely end up” above neutral by next year.

But Mary Daly, chair of the San Francisco Federal Reserve, suggested Wednesday that once the Fed raises rates to a level that no longer encourages or restrains growth, it should proceed with caution.

“If we drag the economy down by adjusting rates too quickly or too much, we risk … tipping the economy into recession,” Daly said.

Lynn A. Saleh