Federal Reserve Chair Jerome Powell is defending the necessity of the Fed’s upcoming plans to continue raising interest rates.
Key Details
- Following its eighth consecutive interest rate hike on February 1, the Fed remains committed to its agenda of lowing inflation below 2% from its current status of 6.5%. It raised rates by an additional 25 basis points to a range of 4.5% to 4.75%.
- In a Tuesday event at the Economic Club of Washington in Washington, D.C., Fed Chair Powell addressed the press for the first time since the announcement and confirmed the Fed’s intentions.
- Powell believes additional rate hikes are necessary, as evidenced by Friday’s strong jobs report. A firm labor market counter signals the effects they expect tightening the currency will have, as the goal of interest rate hikes is to slow down the economy.
Why It’s Important
Inflation and deflation are two of the key buzzwords of the past year. The consumer price index peaked at 9.1% in June 2022, slowly decreasing for the duration of the year concurrent with the Fed’s consecutive interest rate hikes.
January’s Consumer Price Index (CPI), the leading measure of consumer inflation, will be released Tuesday, February 14, and is expected to set the tone for how aggressively the next round of hikes needs to be, particularly in the aftermath of December’s $1.7 trillion omnibus spending bill that could undo some of the Fed’s tightening efforts.
The Problem
While the rate of increasing hikes has declined from 75 basis points in November to 50 basis points in December and 25 basis points last week, Powell warns that subsequent hikes may need to be more aggressive.
Leading voices like Tesla CEO Elon Musk and ARK Invest CEO Cathie Wood have warned that continuous and aggressive hikes could lead to severe deflation. Early indicators in the bond market would suggest that the Fed’s policies have their desired effect and need to be backed off.
At the very least, the current high-interest rate environment stands to slow the economy and hurt working-class Americans as an artificial recession settles in.
Notable Quote
“We think we are going to need to do further rate increases. The labor market is extraordinarily strong … It kind of shows you why we think this is a process that will take a significant period of time. It underscores the message … that we have a significant road ahead to get inflation down to 2%,” says Powell.