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The Fed: Jerome Powell leaves door open for rate hikes larger than 25 basis points

There are reasons to be optimistic that the Federal Reserve can bring inflation down without causing a recession, Fed Chairman Jerome Powell said Monday.

The Fed is forecasting that it can raise its benchmark policy rate to 2.8% by 2023, and inflation will subside over the next three years, while the unemployment rate remains low. Economists call this a soft-landing. 

“Some have argued that history stacks the odds against achieving a soft landing,” Powell said,  in a speech to the National Association for Business Economics. 

“I believe that the historical record provides some grounds for optimism,” he added.

Powell said the Fed was able to raise its policy rates significantly in three episodes — in 1965, 1984, and 1994 — but without precipitating a recession.

While offering soothing words about the outlook for economic growth, Powell stressed a need for the Fed to move “expeditiously” to raise its benchmark policy rate.

Upward pressure on prices from the invasion of Ukraine comes at a time of “already too high inflation,” he said.

In normal times, the Fed might look through a brief burst of inflation, the Fed chair said. But now that inflation is so high, the burst of inflation from the war raises a risk that the public will come to expect higher inflation will continue. Economists believe this can be a self-fulfilling prophecy..

Powell called inflation “much too high” and held the door open for more than one interest rate hike by more than 25 basis points this year.

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said.

Powell said the U.S. economy was much better situated to handle the oil price shock from the war in Ukraine compared to the 1970s.

The U.S. is now the world’s largest producer of oil, he noted.

“Today, a rise in oil prices has mixed effects on the economy, lowering real household incomes and thus demand, but raising investment in drilling over time and benefiting oil-producing areas more generally,” he said. 

“On net, oil shocks tend to weigh on output in the U.S. economy, but by far less than in the 1970s,” he added.

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