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The Federal Reserve’s top official said that the central bank can tweak the pace by which it pulls back on its pandemic-era stimulus as it continues to grapple with high inflation.
In a speech Monday, Fed Chairman Jerome Powell reiterated that the Fed will continue to lean on higher borrowing costs (via higher short-term interest rates) to dampen the demand that is fueling the fast pace of price increases. The goal: to bring inflation back down to an annual pace of about 2% while preserving low unemployment.
“[M]y main message today is that, as the outlook evolves, we will adjust policy as needed in order to ensure a return to price stability with a strong job market,” Powell said.
In February, one major read of inflation showed prices rising by 6.1% year-over-year, the fastest annual pace seen since 1982.
Last Wednesday, the Fed raised interest rates for the first time to address high inflation. It was the first time the central bank increased the benchmark for borrowing costs since 2018.
Powell said “ongoing rate increases will be appropriate” to lower those inflation readings toward 2%. Policymakers at the central bank telegraphed the likelihood that the Fed will raise short term interest rates to somewhere in the neighborhood of 2.5% to 3% by the end of 2024.
After Wednesday’s rate hike, that short-term interest rate target is currently between 0.25% and 0.50%, suggesting that the Fed has a long path of further increases ahead.
Powell joked that “nothing” could stop the Fed from a double bump in interest rates (50 basis points, instead of 25 basis points) at the central bank’s next policy-setting meeting in the first week of May. A 50 basis point increase out of a single meeting has not been done since 2000, but Powell emphasized that the Fed is not committed to a specific path.
“That’s not a decision that we’ve made. What I’ve said is that if we think it’s appropriate to raise 50 basis points at a meeting or meetings, we will do so.”
Those rate hikes will also likely coincide with a Fed plan to shrink its asset holdings totaling over $9 trillion, which it amassed as part of a pandemic-era policy to message to markets its intention to support easy financing.
“I believe that these policy actions and those to come will help bring inflation down near 2% over the next 3 years,” Powell said.
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The challenge for the Fed is raising rates through a significantly uncertain global economy, with the war in Ukraine raising concerns over the danger of a major country like Russia collapsing due to economic sanctions.
Powell brushed off concerns that boxing out Russia from oil would lead to a 1970s-like oil supply shock, noting that the U.S. is now a major producer of oil. But the Fed chief said the rise in oil prices will nonetheless have an impact on U.S. households.
“The magnitude and persistence of these effects remain highly uncertain and depend on events yet to come,” Powell said.