The US Federal Reserve is prepared to heap more pressure on the world’s largest economy by returning to steep interest rate hikes to contain inflation, its chief warned today.
Jerome Powell, chair of the Fed, said the world’s most influential central bank is “prepared to accelerate rate hikes” if the pace of price increases in America stays high.
His comments are likely to be the final nail in the coffin of investors’ hopes that the Fed was drawing its aggressive campaign to fight inflation to a close.
Powell’s remarks also open the door to a return to steep rate increases that were a permanent fixture of last year at the Washington based monetary authority’s next meeting on 21 March.
A curbing in price pressures in the US since the summer peak of around nine per cent had ignited expectations that the Fed had done its job in bringing inflation back to its two per cent target.
But a batch of hotter than forecast economic data over the past couple months indicates Americans are still spending and are willing to swallow price increases by firms.
Businesses are still trying to snap up workers, leading to supply and demand friction in the jobs market that is pumping up wages, which risks baking in elevated prices over the long run.
To tame those dynamics, “the ultimate level of interest rates is likely to be higher than previously expected,” Powell said in a testimony at the US congress.
He said the path to binding inflation is “likely to be bumpy,” a nod to a necessary increase in joblessness and a possible recession to soften demand.
Inflation is currently running at 6.4 per cent, the lowest rate since October 2021. Core inflation, which strips out items that often exhibit volatile price moves, has stayed high, steering Powell back toward a tough hawkish position.
The Fed has already raised the global financial system’s anchor rate – the federal funds rate – by more than 400 basis points since its first rise last March to a range of 4.5 per cent and 4.75 per cent.
To get to that point, the Fed launched a series of outsized 75 basis point and 50 basis point increases, but retreated to a smaller 25 basis point move at its last meeting.
Money markets are now pricing in a return to a 50 basis point jump at this month’s federal open market committee summit.
New jobs market data on Friday is now pivotal to predicting what the Fed will wind up doing later this month. If it shows wages are still racing and companies hunting workers, the risk of a larger rate increase would amplify.
Powell’s cumulative tightening cycle is already the most aggressive since the early 1980s when former Fed chief Paul Volcker led the charge against a tough inflation crunch.
Traders piled into the US dollar on Powell’s remarks today, with the Wall Street journal’s dollar index – which measures the greenback against a basket of top currencies – leaping nearly one per cent.
Yields on the 2-year Treasury scaled to their steepest level since the eve of the financial crisis in 2007, while Wall Street stocks tumbled.
Economists reckon the Bank of England will sign off an eleventh straight increase on 23 March, most likely a 25 basis point jump to 4.25 per cent.
European Central Bank officials are expected to continue an aggressive campaign to tame prices. Markets reckon president Christine Lagarde and co will send euro rates to a peak of four per cent – a record high – and get there off the back of several back to back 50 basis point increases.