Bloomberg — U.S. Federal Reserve Chairman Jerome Powell has shown his toughest stance yet to rein in inflation, potentially backing two or more half-percentage-point interest-rate hikes and described the labor market as overheated. .
“I would say that 50 basis points will be on the table for the May meeting”Powell said at a panel organized by the IMF on Thursday in Washington, which he shared with the president of the European Central Bank, Christine Lagarde, and other authorities. He said the demand for workers is “too hot, unsustainably hot.”
The Fed chief takes direct aim at the strong demand that the central bank wants to cool down. It’s a strategy that carries considerable risk to American workers and the economy’s overall growth prospects in the coming months, as well as to the Fed itself in a midterm election year when inflation is a major concern. among ordinary Americans.
“This is going to be a very close denouement on whether or not we will have a recession,” said Ethan Harris, head of global economics at Bank of America Securities (BAC). “They have to take monetary policy into tight territory, and they probably need some sort of increase in the unemployment rate.”
Powell also reinforced expectations for another half-point hike in June, citing minutes from last month’s policy meeting that indicated many officials had signaled that “one or more” 50 basis point hikes might be appropriate to curb the spread. highest inflation in four decades.
Investors are betting on half-point gains in May, June and possibly July. The rise in yields, in turn, has unsettled the stock market, with the S&P 500 index closing 1.5% lower on Thursday.
Powell’s colleague at the St. Louis Fed, James Bullard, has also opened a discussion about whether to make a more aggressive 75 basis point hike if necessary. Even some normally dovish officials, such as San Francisco’s Mary Daly, have said a couple of half-point moves are likely, though she was wary of a bigger move.
“The tactics of whether it’s 50, 25 or 75, those are things that I will deliberate with my colleagues,” he said in an interview with Yahoo! Finance on Thursday. “But my own starting point is that we don’t want to go so fast or so sharply that we catch Americans by surprise and cause them to have to adapt quickly.”
Powell “approved a 50 basis point hike in May, but I think the June hike will also be of that magnitude and maybe even higher.”said Yelena Shuliatyeva, a senior American economist at Bloomberg Economics.
For some, it’s too little too late. Critics say US central bankers are stuck in a political bind of their own making. Prices began to accelerate in the fourth quarter, as employers shrugged off the latest wave of the coronavirus and added more than half a million workers each month.
Wage increases picked up and demand strengthened, amplifying inflationary pressures across the economy even as the Fed continued to add stimulus by holding rates near zero and buying bonds.
Last year, monetary policymakers wanted to avoid preemptive tightening, but the combination of fiscal stimulus, monetary support and recovery in demand left them behind from inflationary pressures that were already underway.
The consumer price index rose 8.5% in March from a year earlier, the highest figure since 1981; The Fed’s target is based on a separate measure known as the personal consumption expenditures price index, which rose 6.4% in the year to February. The Russian invasion of Ukraine is likely to drive up food and energy prices even higher.
Now, Fed officials are scrambling to raise interest rates back to a level that won’t add any more stimulus, and possibly move into tightening territory. Powell said the Fed will no longer forecast easing in goods prices and improving supply chains, which could be an acknowledgment that pressures have spilled over into services prices as well.
“I don’t understand why they’ve done this,” Harris said. “They had plenty of opportunities to take the exit ramp and they never did.”
Another uncertainty in political strategy is what happens to financial conditions when officials start withdrawing assets from their balance sheets. Federal Reserve officials have signaled that this process will be announced in May, with the withdrawal of a combined $95 billion a month from Treasuries and mortgage-backed securities.
Shulyatyeva said there is no reliable estimate on how much of an adjustment the withdrawal of funds will entail.
“They want to believe they can pull off a soft landing,” Shulyatyeva said. “It will be extremely difficult to do so. Monetary policy is a very blunt tool.”