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Speaking at the spring meeting of the International Monetary Fund on 21 April, Jerome Powell, chair of the U.S. Federal Reserve hinted the central bank is likely to raise its key interest rate by half a percentage point when its rate-setting committee meets next month.
Powell cited the Fed’s series of rate hikes from 2004 to 2006, when the bank raised interest rates by a quarter point at a time and inflation was running slightly above 3 percent.
However, inflation is “much higher now,” Powell said, and current interest rates are lower.
Therefore, “it is appropriate” for the Fed to move “a little more quickly” now, he concluded. “There is something to be said for front-end loading any accommodation one thinks is appropriate.
“Fifty basis points [half a percentage point] will be on the table for the May meeting,” he added.
Many Fed officials already have called for a half-point boost next month and investors already have priced that size of an increase.
“Investors largely expect the Fed to raise rates by 0.50 points at its May, June, and July policy meetings, moves that would place the benchmark rate at roughly 2 percent late July, up from the 1.5 percent markets were projecting just one month ago,” Business Insider reported.
Markets show an expectation that the Fed’s rate will reach 2.5 percent by the end of this year, a level not seen since July 2019.
Previously, the central bank thought that inflation would ease when supply chain kinds were straightened out.
Now, because of the war in Ukraine and resulting sanctions, the Fed is “no longer going to count on help from supply-side healing,” Powell said.
Relaxed shipping channels would be “enormously helpful” and “if we get that, that would be great,” Powell added, “but we’re really going to be raising rates and getting expeditiously to levels that are more neutral, and then that are actually tightening policy if that turns out to be appropriate.”
Powell invoked the name of Paul Volcker, the cigar-puffing Fed chair in the late 1970s and early 1980s who took the bank’s key rate to almost 20 percent to tame runaway inflation.
“In order to tame inflation and heal the economy, he had to stay the course,” Powell said.
Through most of last year, the Fed chose to leave interest rates low and let inflation range far above its 2-percent target in order to nurture a recovery in the jobs market across income, gender, and racial groups.
The central bank insisted that inflation was “temporary,” then “transitory,” and would fall on its own once supply chain tangles were unraveled.
Late last year, in Congressional testimony, Powell admitted the Fed had allowed inflation to get out of hand, that supply lines weren’t opening, and that the bank had to revise its policy and take action, as we reported in “The Powell Push: For Better or Worse” (7 Dec 2021).
PUBLISHER’S NOTE: At his December 2020 press conference, Fed-Head Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
Wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation this year would be 2.4 percent.
Instead, it topped 6 percent in October and has averaged 4.1 percent from January through October.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In his December testimony, Powell admitted it is “probably a good time to retire” the Fed’s characterization of inflation as transitory.
TREND FORECAST: The Fed misread the implications of rising inflation and now will try to play catch-up. The only meaningful way the Fed can do that is to raise interest rates higher and faster than the economy can handle, especially during a global slowdown, which we detail in “Global Economy Slows” in this issue.
The Fed will not raise rates past the point that it believes the economy can handle without going into a rate-shock recession.
The Fed’s higher rates will do more to curb business and consumer activity than it will to rein back inflation.