The Fed will keep raising rates until it gets inflation under control
WASHINGTON — Chairman Jerome Powell on Tuesday underscored the Federal Reserve’s determination to keep raising interest rates until there is clear evidence that inflation is steadily falling — a big-picture effort. issues that carry the risk of provoking a possible recession.
Increases by the Fed to its benchmark short-term rate typically, in turn, lead to higher borrowing costs for consumers and businesses, including for mortgages, auto loans and credit cards.
“What we need is a clear and convincing decline in inflation,” Powell told a Wall Street Journal conference. “And we’re going to keep pushing until we see that.”
The Fed Chairman, who was confirmed last week by the Senate for a second four-year term, suggested the Fed would consider raising rates even faster if price increases do not moderate.
“What we need to see,” Powell said, “is clear and compelling evidence that inflationary pressures are coming down and inflation is coming down. And if we don’t see that, then we need to consider acting more aggressively. If we see this, then we can consider moving to a slower pace.
And he said the Fed “would not hesitate” to push its benchmark rate to a point that would slow the economy if necessary. While it’s unclear at what level this might be, Fed officials peg it at around 2.5% to 3%, about triple its current level.
Powell’s remarks on Tuesday followed other statements he made that indicated the Fed was implementing a series of rate hikes that could be the fastest credit crunch in more than 30 years.
At a meeting earlier this month, the Fed raised its key rate by half a point – double the usual increase – for the first time since 2000, to a range of 0.75% to 1%. And at a press conference after the meeting, Powell suggested that Fed officials would continue to raise its rate by half a point at its June and July meetings.
The Fed chairman appeared indifferent on Tuesday to the sharp decline in the stock market over the past six weeks. The declines partly reflect fears on Wall Street that the Fed’s efforts to control inflation, which has reached 40-year highs, could weaken the economy to the point of triggering a recession. Stock prices also often fall as interest rates rise, increasing bond yields.
Asked if the Fed’s rate hikes could disrupt financial markets, without necessarily lowering inflation, Powell replied, “I don’t see that happening.”
The interest rate, or yield, on the two-year Treasury bill has risen steadily since the start of the year, which Powell pointed to as a sign that Wall Street expects the Fed to continue to tighten. credit. Such expectations should help slow borrowing and spending and cool the economy.
“It’s been good to see financial markets react in advance” of the upcoming rate hikes, Powell said. “That’s what we need.”
The S&P 500, a broad stock index, has fallen about 15% from its January peak. This is just below the 20% drop that marks a bear market. Still, many economists say Powell is unlikely to let market turmoil alter the Fed’s course, given that inflation has reached such high levels and is causing hardship for millions of households.
“Markets are orderly, they work,” Powell said. “There are volatile days and volatile markets, but so far I think we’re doing pretty well.”
The Fed Chairman also suggested, more explicitly than before, that the central bank’s efforts to reduce inflation could cause some people to lose their jobs, pushing up the unemployment rate.
Powell said the Fed’s goal was to cool consumer and business spending and bring it more in line with the tight supply of goods and workers. This, in turn, should tame inflation.
The Fed hopes to achieve this, Powell said, while maintaining labor market strength. But that doesn’t mean the jobless rate would necessarily stay at 3.6%, where it currently is, he said.
“You would still have a pretty strong labor market if unemployment were to go up a few ticks,” he said.