Jerome H. Powell, the chair of the Federal Reserve, on Thursday signaled that the central bank was prepared to raise interest rates rapidly starting in May as it tries to cool down the economy and prevent rapid inflation from becoming a lasting feature.
“We really are committed to using our tools to get 2 percent inflation back,” Mr. Powell said, speaking at an International Monetary Fund debate on the global economy alongside the European Central Bank head Christine Lagarde and other policymakers.
The Fed lifts borrowing costs in order to cool down consumer demand and slow the economy when it is at risk of overheating. Given how rapid inflation is and how low interest rates are right now, “it is appropriate, in my view, to be moving a little more quickly” through that process, Mr. Powell said.
A larger-than-usual half percentage point interest rate increase “will be on the table for the May meeting,” he added.
The Fed chair’s comments come at a challenging juncture for the United States and the global economy. Growth has rebounded strongly from early in the pandemic, but that progress has come alongside stubbornly rapid inflation in America and other advanced economies.
As prices rise at a pace not seen in decades, Russia’s war in Ukraine is exacerbating the situation by further disrupting supply chains and pushing up gas prices. At the same time, the conflict is expected to spur recessions in several Eastern European economies this year and is damaging the broader global economic outlook.
While US policymakers have been monitoring the risks to growth, they are even more concerned with the war’s impact on inflation, from a domestic economic perspective. America’s Consumer Price Index for March showed that prices climbed 8.5 percent, the fastest pace since 1981, as oil prices surged amid the conflict, rents continued to climb and an array of goods and services became more expensive.
The breadth and persistence of high US inflation have unsettled Mr. Powell and his colleagues. While they had initially hoped rapid price increases would fade as the economy returned to some version of normal, in March the Fed began lifting interest rates to try to keep high inflation from becoming more permanent.
Even since that meeting last month, officials and markets have come to anticipate a much faster pace of Fed action to slow the economy. Fed officials in March projected that they would make seven quarter-point rate increases in 2022; even officials who have long pushed for low rates are now suggesting that nine would probably be appropriate.
To fit in that many increases, the Fed will have to raise interest rates by half a point at some of its meetings. As of Thursday morning, investors expected Fed officials to raise interest rates by half a percentage point at their upcoming meeting on May 3-4, and at least that much at their two subsequent meetings, so that interest rates would rise from less than 0.5 percent now to above 2 percent in July.
Market pricing suggests that by the end of the year rates will be closing in on 3 percent, a height they have not touched since before the 2008 financial crisis.
Fed officials expect to couple their interest rate increases with a plan to shrink their balance sheet, which was bloated by pandemic-era bond purchases meant to soothe the economy. Shrinking those holdings will push longer-term interest rates higher and further slow down the economy. A plan for the balance sheet could come in May and start in June, officials have signaled.
The US central bank’s withdrawal of policy support comes as rapid wage gains, rapidly climbing housing costs and increasing price pressures in service industries combine with global supply disruptions to paint a dicey picture for inflation outlook. Officials have become more convinced that price gains are not going to fade unless they are actively slowing down the economy to wrestle them under control.
That has prompted a growing number of policymakers to call for policy rates that are not just poised to react if needed but are high enough to actually weigh on economic activity.
“There’s more alignment on getting monetary policy to a neutral, slightly-restrictive stance,” Charles Evans, president of the Federal Reserve Bank of Chicago, said at an event this week. “We’ll probably end up with something that is more restrictive.”
A key question is whether the Fed will be able to cool down the economy and control inflation without tipping the American economy into a recession, one that pushes unemployment higher and erases some of the gains won in the wake of pandemic lockdowns.
Fed officials, including Mr. Powell, have acknowledged that striking that balance – while possible – could be challenging.
“That’s our goal,” Mr. Powell said of a soft landing, while noting that nobody at the Fed would argue that it would be easy to achieve.
“I don’t think you’ll hear anyone at the Fed say that’s going to be straightforward or easy.” Powell said. “It’s going to be very challenging. We’re going to do our very best to accomplish that. ”