Raising rates to curb inflation ‘won’t be painless’, warns Fed chief Jerome Powell

The hike in key rates launched in March by the Federal Reserve, the US central bank, to bring inflation back to its highest level since the early 1980s at 2%, its target, will shake things up, because this traditional means of fighting rising prices could affect economic growth and employment.

“It’s not going to go away without pain,” Fed Chairman Jerome Powell said Thursday in an interview with Marketplace, NPR’s daily business program on public radio.

Rates from 0.75% to 1% today

After raising rates by a quarter percentage point in March and then by half a percentage point on May 4 (the biggest increase in more than 20 years), key rates are now between 0.75 and 1.00%. And by the end of the year we should expect a further increase. Challenge: Slow down demand as inflation surged to 6.6% y/y in March, the highest level since 1982, according to the US Central Bank’s PCE index.

But someone who has just been renominated for a second term by the US Senate believes that, “the most painful thing would be not being able to resist this and for inflation to gain a foothold in the economy at a high level”. A speech different from those that have taken place so far. Indeed, Jerome Powell has said so far that he is confident that the Fed will succeed in slowing inflation without slowing the economy. “We have the tools”he still scored.

“Our goal, of course, is to bring inflation down to 2% without falling into a recession in the economy, or to maintain a fairly strong labor market,” he said. But things may turn out to be more complicated than originally thought: “Whether we can perform a soft landing or not may actually depend on factors beyond our control.”

“A soft landing simply means lowering inflation to 2% while maintaining a strong labor market. And that’s pretty hard to do right now.”he confessed.

It remains to be seen what the scale of the next increase will be.

“If the economy is doing about as well as expected, it would be wise to pass an additional 50 basis points (half a point, editor’s note) in the next two meetings.”pointed out by Jerome Powell, specifying that “If things go better than expected, we are ready to do less. If worse than expected, we are ready to do more”.

Going further than half a point seems risky for Rafael Bostic, president of Antenna in Atlanta. For the next two or three monetary policy meetings, the latter recommended on Monday to stick to a half-point increase so that there is time to assess their impact on the economy and inflation before deciding whether further increases are needed.

Up 50 basis points “this is already quite an aggressive decision”, he told Bloomberg. “I don’t think we need to be more aggressive. he added, presumably excluding the 75 basis point increase that the markets were expecting.

Jerome Powell said Wednesday that there was no three-quarter point rate hike. “actively” reviewed by members of the Federal Open Market Committee (FOMC). However, many investors and economists believe that the Fed will have no choice but to raise rates even further given the current rate of inflation.

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Several confirmed positions

Senate reappointed Jerome Powell, a 69-year-old former lawyer and banker who has run the Fed since 2012, was named head of the institution in 2018 by Donald Trump. He then succeeded Janet Yellen, who has since become Joe Biden’s Treasury Secretary. The Senate has already confirmed Lael Brainard as vice president, as well as Philip Jefferson and Lisa Cook as governors, who became the first black woman to take office despite Republican opposition. The equality of votes between the two camps even required the vote of United States Vice President Kamala Harris to win a majority. Elected officials have yet to make a decision on Michael Barr’s appointment as vice president of banking regulation after the original choice, Sarah Bloom Raskin, withdrew due to a lack of sufficient support. The decision to offer Jerome Powell a second four-year term was announced in November by Joe Biden. The appointment of the chairman of the Fed is, from an economic point of view, one of the most important decisions of the US president’s mandate.