Federal Reserve Chair Jerome Powell says that continued high inflation is creating the need for more aggressive interest rate hikes.
Key Details
- Fed Chair Powell testified before the Senate Committee on Financial Services on Tuesday and is scheduled to address the House of Representatives on Wednesday regarding the Federal Reserve’s success in addressing inflation.
- Powell admitted that inflation has remained higher than expected, and improvements are slowing down at a rate slower than desired.
- He argued for a more aggressive approach to interest rate hikes, as necessary, but optimistically noted that it will likely not harm the economy as profoundly as some fear, as recession fears have run hot within the past year.
- March’s interest rate hike could be 50 basis points, up from February’s 25 basis points. The next Fed meeting is from March 21 to 22 and will likely announce another hike.
Why It’s News
With the rapid increase in inflation over the past two years, the Federal Reserve has rushed to address the issue with eight aggressive interest rate hikes in just the past 12 months. The most recent hike came on February 1, adding 0.25% and increasing rates to a range of 4.5% to 4.75%. During the pandemic, the rate was almost 0%.
The rapid increase in interest rates stands to tighten the currency further, resulting in a potential recession, high unemployment, and short-term financial distress. Powell has acknowledged this since before his Jackson Hold speech in August, arguing that the adverse effects of entrenched inflation are far more destructive.
Backing Up A Bit
Recent nudges of the consumer price index (CPI) gave the Fed confidence to back away from 75-basis-point hikes, lowering them to a more manageable 25 points. January’s yearly CPI rate hit 6.4%, down from 9.1% in June but well above the desired target of 2%. The Department of Labor is expected to announce February’s CPI number on March 14, which will likely play into the Fed’s decision.
The Fed is expected to raise interest rates at least three more times before the summer.
Many analysts have warned about the extent to which this could backfire. Tesla CEO Elon Musk and ARK Invest CEO Cathie Wood have warned that these actions could cause deflation. Bank of America economist Ethan Harris warns that the Fed will let a severe recession happen. A Wharton Business School Professor Jeremy Siegel warns that the move is too aggressive and will harm the working class.
Notable Quote
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated … If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes … Will working people be better off if we just walk away from our jobs if inflation remains at 6%?” says Powell.