The central bank of United States must act quickly to control inflation that is too high, the president of the Federal Reserve, Jerome Powelland added that the entity could apply interest rate hikes higher than usual if necessary.
“The labor market is too strong and inflation is too high,” Powell said, in remarks prepared for a conference of the National Association for Business Economics.
“There is an obvious need to move quickly to return the monetary policy stance to a more neutral level and then move to more restrictive levels if that is what is required to restore price stability.”
In particular, he added, “if we conclude that it is appropriate to act more aggressively by raising the fed funds rate by more than 25 basis points in a meeting or meetings, we will do so.”
Last week, Fed policymakers raised interest rates for the first time in just over three years, signaling more hikes are on the way.
Most of them see the short-term policy rate, which has hovered near zero for two years, at 1.9% by the end of this year, a pace that could be achieved with increases of a quarter of a percentage point in each of the its next six monetary policy meetings.
By the end of next year, Fed officials expect the central bank’s benchmark overnight rate to sit at 2.8%, which would push borrowing costs to a level where they would actually start to weigh on growth. Most agency officials see the “neutral” level as between 2.25% and 2.5 percent.
Powell also reiterated Monday that the Fed’s cuts to its huge balance sheet could start as early as May.
The US unemployment rate is currently 3.8% and job openings per person are at a record level.
Inflation risks
However, according to the Fed’s preferred indicator, the inflation triples the central bank’s 2% target, driven by complications in the supply chains that have taken longer to fix than most expected and could get worse as China responds to new surges in Covid-19 with new lockdowns.
Adding the pressure on prices, the Russian war in Ukraine it is driving up the cost of oil, threatening to push inflation even higher. The United States, now the world’s largest oil producer, is better able to withstand an oil shock now than it was in the 1970s, Powell noted.
Although the Fed in normal times probably wouldn’t tighten monetary policy to deal with what could ultimately be a temporary rise in commodity prices, Powell said, “it increases the risk that a prolonged period of high inflation could make long-term expectations are uncomfortably higher.
Last year, the Fed repeatedly forecast that supply chain pressures would ease and was repeatedly disappointed.
“As we set monetary policy, we will look for real progress on these issues and will not assume significant supply-side easing anytime soon,” Powell said Monday.
Fed policymakers hope to control inflation without hampering growth or sending unemployment back up, and their forecasts released last week suggest they see a way to do that, with the median inflation outlook falling to 2.3% by 2024, albeit with unemployment still at 3.6 percent.
Powell said Monday that he expects inflation to fall “close to 2%” over the next three years, and while a “soft landing” may not be easy, there is plenty of historical precedent.
“The economy is very strong and well positioned to handle tighter monetary policy,” he said.
