Federal Reserve Chairman Jerome Powell confirmed the central bank’s willingness to bring inflation down and said Thursday that aggressive rate hikes are possible as soon as next month.
“I think it’s appropriate to move a little faster” to raise interest rates, Powell said, while part of a panel from the International Monetary Fund moderated by CNBC’s Sara Eisen. “I also think there is something to be said for the front-end loading of any dwelling one thinks is appropriate … I would say 50 basis points will be on the table for the May meeting.”
Powell’s statements essentially meet market expectations that the Fed will deviate from its usual 25 basis point increases and move faster to tame inflation, which has been running at its fastest pace for more than 40 years. A basis point corresponds to 0.01 percentage point.
But as Powell spoke, market prices for interest rate hikes became somewhat more aggressive.
Expectations for a 50 basis point move in May rose to 97.6% according to CME Group’s FedWatch Tool. Traders also priced an additional increase equivalent to at the end of the year that would bring the Fed funds rate, which sets the day-to-day lending level for banks, but is also tied to many consumer debt instruments, to 2.75%.
Shares also fell, sending the Dow industries down more than 400 points, and the Nasdaq with its price-sensitive technology stocks fell more than 2%. Government interest rates pushed up, with the leading 10-year note at the latest at 2.9%.
At its March meeting, the Fed approved a move of 25 basis points, but officials have said in recent days that they see a need to move faster with consumer inflation running at an annual rate of 8.5%.
“Our goal is to use our tools to get demand and supply back in step so that inflation moves downward and does so without a downturn equivalent to a recession,” Powell said. “I do not think you will hear anyone in the Fed say it will be straightforward or easy. It will be very challenging. We will do our best to achieve that.”
“Restoring price stability is absolutely crucial,” he added. “Economies do not work without price stability.”
The Fed had opposed raising interest rates through 2021, even though inflation was well above the central bank’s 2% long-term target. According to a policy framework adopted at the end of 2020, the Fed said it would be content to keep inflation warmer than usual in the interest of achieving full employment that was inclusive across income, race and gender demographics.
Until several months ago, Powell and Fed officials had insisted that inflation was “transient” and would disappear as Covid pandemic-related factors such as clogged supply chains and oversized demand for goods relative to services declined. Powell said, however, that these expectations “disappointed” and that the Fed has had to change course.
“It may be that the actual [inflation] the peak was in March, but we do not know, so we will not expect it, “he said.” We will really raise interest rates and quickly come up to levels that are more neutral, and then are actually tight … if it turns out to be appropriate when we get there. “
This will be Powell’s last remarks before the meeting on 3-4. May in the Federal Open Market Committee, which sets interest rates. He is the latest Fed official to say that swift action is needed to bring down inflation.
Along with the rate hikes, the Fed is expected to soon begin reducing the amount of bonds it holds. The central bank’s balance sheet is now close to $ 9 trillion, consisting primarily of government bonds and mortgage bonds.
Discussions at the March meeting indicated that the Fed would eventually allow $ 95 billion of bond proceeds to roll out each month.
Powell noted that other than harmful inflation, the US economy is “very strong” otherwise. He characterized the labor market as “extremely tight, historically speaking.”
Earlier in the day, he referred to former Fed Chairman Paul Volcker, who fought inflation in the late 1970s and early 80s with a series of rate hikes that eventually led to a recession. Volcker “knew that in order to tame inflation and heal the economy, he had to stay the course,” Powell said.
The Volcker Fed eventually raised the benchmark rate to almost 20%; it is currently in a range between 0.25% and 0.50%.