Fed will raise rates more aggressively if needed, Powell says

U.S. Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled “The Semiannual Monetary Policy Report to the Congress”, in Washington, U.S., March 3, 2022. Tom Williams/Pool via REUTERS

March 21 (Reuters) – Federal Reserve Chair Jerome Powell on Monday delivered his most muscular message to date on his battle with too-high inflation, saying the central bank must move “expeditiously” to raise rates and possibly “more aggressively” to keep an upward price spiral from getting entrenched.

In remarks that sent financial markets scrambling to recalibrate for a higher probability of the Fed lifting interest rates by a half-percentage point at one or more of its remaining meetings this year, Powell signaled an urgency to the central bank’s inflation challenge that was less visible than just a week ago, when the Fed delivered its first rate hike in three years.

“The labor market is very strong, and inflation is much too high,” Powell told a National Association for Business Economics conference. “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.”

In particular, he added, “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.”

AIG’s global head of strategy, Constance Hunter, called it Powell’s “the buck stops here” speech.

U.S. stocks fell, and traders — already betting on at least a quarter-point interest rate increase at each of the year’s remaining six Fed meetings — moved to price in a better-than even chance of half-point interest rate increases at each of the Fed’s next two meetings in May and June.

That would lift the short-term policy rate – pinned for two years near zero – to a range of 2.25% to 2.5% by the end of the year, higher than the 1.9% that Fed policymakers just last week anticipated. read more

Most Fed policymakers see the “neutral” level as somewhere between 2.25% and 2.5%.

Powell repeated on Monday that the Fed’s reductions to its massive balance sheet could start by May, a process that could further tighten financial conditions.

“This is not just going to be a near-term tactical phenomenon,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments in New York. “This is a more strategic type of messaging, I think, from the Fed.”

A consensus for more aggressive tightening – or at least an openness to it – appears to be growing.

Atlanta Fed President Raphael Bostic, who expects a slightly gentler path of rate increases than most of his colleagues, said earlier on Monday he is open to bigger-than-usual rate hikes “if that’s what the data suggests is appropriate.” read more

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