West News Wire: Fed Chair Jerome Powell said Monday that the Fed will raise its benchmark short-term interest rate faster than expected, and high enough to restrict growth and hiring, if necessary.

Powell’s message was more aggressive than his remarks when the Fed lifted its key rate by a quarter-point from near zero to a range of 0.25 percent to 0.5 percent last week. (“Hawks” tend to favour higher rates to combat inflation, whilst “doves” want lower rates to boost hiring.)

His comments, made during a lecture to the National Association for Company Economics, provoked a dramatic plunge in the stock market, implying that considerably higher rates for mortgages, auto loans, credit cards, and other consumer and business borrowing could be on the way. Stocks in the United States recovered later in the day, with the S&P 500 index ending the day with a loss of less than 0.1 percent.

Powell stated that if required, the central bank would be willing to raise rates by a half-point across several Fed meetings. Since May 2000, the Fed hasn’t hiked its target rate by a half-point.

He also suggested that authorities could go so far as to raise rates to “restrictive” levels, slowing economic growth and possibly raising unemployment.

“We will take the necessary steps to ensure a return to price stability,” the Fed chair said in his speech to the NABE’s annual economic policy conference. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than (a quarter-point) at a meeting or meetings, we will do so.”

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The Fed is under pressure from widespread criticism that it has reacted too slowly to a price spike that has catapulted inflation to four-decade highs. When they met last week, Fed officials forecast that they would raise rates six more times this year and four times in 2023. They also projected that inflation would slow to 2.7% by the end of next year.

Powell cautioned Monday that those projections of future interest rates and inflation “can become outdated quickly at times like these, when events are developing rapidly.”

According to an NABE survey of its member economists, 77% think the Fed’s interest rate policy remains too low. Nearly the same proportion said they believed inflation would remain above 3% next year, suggesting that the Fed’s inflation expectations are too optimistic. NABE members mostly work for large businesses, consulting firms, and trade associations.

Last week, the Fed’s policymakers projected that the economy would remain resilient enough to keep growing and that the unemployment rate would fall from its current level of 3.8% to 3.5% by year’s end, matching a 50-year low reached before the pandemic.

Some economists argue that such a painless outcome what they refer to as a “soft landing” is unrealistic, given the challenges the economy faces, including the potential for deeper economic disruptions resulting from Russia’s invasion of Ukraine. The war has already raised the cost of oil, wheat, nickel and other vital commodities.

But Powell asserted that the Fed has achieved such soft landings before.

 

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