- FOMC Will Hike ‘More Aggressively” if Inflation Doesn’t Cool
- Won’t Hesitate To Raise Funds Rate Beyond Neutral
- Unemployment May Have to Rise ‘A Few Ticks’; Landing May Have To Be ‘Softish’
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell vowed Tuesday the Fed will continue to raise interest rates until it sees “clear and convincing evidence” inflation is heading back toward its 2% goal, even it means that unemployment ticks up “a few tenths.”
Powell, participating in a live-streamed event hosted by the Wall Street Journal, said the Fed would raise the federal funds rare “more aggressively” if it does not see such evidence and “won’t hesitate” to take rates higher than “neutral.”
To restore “price stability,” which he called a long run prerequisite for a healthy economy, Powell said the Fed needs to soften demand and slow growth by tightening financial conditions.
In doing so, Powell has heretofore sounded confident of achieving a “soft landing,” i.e. avoiding a recession. However, in his latest outing, he said the Fed may have to settle for a “softish landing” that could get “bumpy.” Unemployment might need to go higher than the 3.6% registered in April, he said.
After the Fed’s rate-setting Federal Open Market Committee raised the funds rate for a second time on May 4, this time by 50 basis points, Powell said further such rate hikes will be “on the table” at the FOMC’s June and July meetings.
Powell downplayed the likelihood of a 75 basis point rate hike then, but that didn’t stop other FOMC voters from hinting a bigger rate hike might be an option. For instance, last week, Cleveland Federal Reserve Bank Loretta Mester seemed to hold open that possibility at the Sept. 20-21 meeting if inflation fails to moderate by then.
“I expect it to be appropriate to raise the policy rate another 50 basis points at each of our next two meetings,” she said, adding, “If by the September FOMC meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow, but if inflation has failed to moderate, then a faster pace of rate increases may be necessary.”
Powell, who last week was confirmed for a second four-year term by the U.S. Senate, took a similar tack Tuesday.
After reiterating that 50 basis point rate hikes will be “on the table” at the June and July FOMC meetings, he said, “what we need to see is clear, convincing evidence that inflation pressures are abating … . If we don’t see that we’ll have to consider moving more aggressively.”
Powell also allowed for smaller rate hikes, adding, “if we do (see evidence of falling inflation)we’ll consider a slower pace.”
But the Fed chief was adamant about the FOMC’s determination to curb inflation, asserting, “No one should doubt our resolve … . We’re going to keep pushing until we see” evidence that inflation is returning to 2%.
Critics charge the Fed was too slow to move away from an historically easy monetary policy, and Powell conceded inflation proved more persistent than he and his fellow policymakers thought, but said that since it began to shift toward a tighter policy the Fed has been moving “expeditiously to a more normal level” and may reach neutrality “in the fourth quarter.”
The fact that bond yields and other financial conditions have tightened in anticipation of continued rate hikes proves the Fed’s anti-inflationary credibility is intact, he suggested.
The FOMC projects the “longer run” or “neutral rate” to be 2.4%.
But that won’t necessarily be “a stopping point,” Powell said. “We don’t know where neutral is or where tight is.”
Powell said the FOMC will have to judge meeting by meeting whether financial and economic conditions are evolving so as to “restore balance” between supply and demand.
He said the FOMC will be asking, “what’s happening with the economy? Are we starting to see what we need to see – really clear and convincing evidcnce that inflation is coming down?”
“That’s what we really need to see,” he continued. “If that means going past neutral we won’t hesitate…We won’t.”
Powell pledged “we will go (on raising rates) until we’re at the point where financial conditions are in an appropriate place and inflation is coming down. We will go to that point…there won’t be any hesitation about that.”
Asked whether he still thinks the Fed can still achieve a “soft landing,” Powell hedged more than he has in the past.
“It’s going to be a challenging task,” he said, pointing to increased uncertainties generated by the war in Ukraine and China’s anti-Covid lockdowns, which he said have exerted downside risks to growth along with upside risks to inflation.
Powell said there are “clearly paths” to a “soft landing” but said that in the Fed’s effort to moderate demand in the face of supply shortages the labor market could become less “strong” than it’s been.
“A strong labor market..doesn’t mean the unemployment rate has to stay at 3.6%,” he said. “You can still have a strong labor market if the unemployment rate were to move up a few ticks.”
Rather than a “soft landing,” the Fed may get just a “softish landing” – one that might get “a little bumpy,” Powell added.
Nonetheless, he said, “We have to slow growth to do (cool inflation)….Growth has to move down for inflation to come down…”
“The main thing is to get inflation down,” he went on. “This is not a time for particularly nuanced readings of inflation. We need to see inflation come down in a convincing way.”
“Until we see that we’re going to keep going…,” he declared. “We need to push ahead with rate increases” and “make the evaluation…is this the right level? Should we slow down? Should we speed up?”
At each meeting, the FOMC will have to “make a judgment: where are we? Have we gotten to where we need to get? “If not we’ll keep going.”
Contact this reporter: steve@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery contact tony@macenews.com. Twitter headlines @macenewsmacro.