The Federal Reserve is willing to move more aggressively than by 25 basis point interest rate increases to bring inflation down, but the economy is strong enough to avoid a recession, Fed Chairman Jerome Powell said Monday.
“We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in a speech to the National Association for Business Economics.
Powell said the Fed was willing to raise rates high enough to restrict growth if needed.
The Fed raised its benchmark policy rate by 25 basis points to a range of 0.25% to 0.5% last week and forecast a steady pace of rate hikes over the coming two years.
The Fed sees its policy rate reaching 1.9% this year and 2.8% in 2023.
“I believe that these policy actions and those to come will help bring inflation down near 2 percent over the next 3 years,” Powell said,
The story that inflation would peak in the first quarter has “fallen apart,” he said. Over the coming year, the Fed will not base policy on forecasts of progress on inflation, but will want to see “actual progress,” he said.
Asked if the Fed would be satisfied if inflation returned to a 3% rate, Powell said it was not something the central bank was looking at.
Despite this tough talk, the Fed chairman said there were grounds for optimism that the Fed could slow inflation without causing a recession.
The Fed is forecasting that it can raise its benchmark policy rate to 2.8% by 2023, and inflation will subside over the next three years, while the unemployment rate remains low. Economists call this a soft-landing.
“Some have argued that history stacks the odds against achieving a soft landing,” Powell said, in a speech to the National Association for Business Economics.
“I believe that the historical record provides some grounds for optimism,” he said.
“Soft, or at least soft-ish, landings have been relatively common in U.S. monetary history,” he argued.
Powell said the Fed was able to raise its policy rates significantly in three episodes — in 1965, 1984, and 1994 — but without precipitating a recession.
Upward pressure on prices from the invasion of Ukraine comes at a time of “already too high inflation,” he said.
In normal times, the Fed might look through a brief burst of inflation, the Fed chair said. But now that inflation is so high, the burst of inflation from the war raises a risk that the public will come to expect higher inflation will continue. Economists believe this can be a self-fulfilling prophecy.
“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said.
Powell said the U.S. economy was much better situated to handle the oil price shock from the war in Ukraine compared to the 1970s.
The U.S. is now the world’s largest producer of oil, he noted.
“Today, a rise in oil prices has mixed effects on the economy, lowering real household incomes and thus demand, but raising investment in drilling over time and benefiting oil-producing areas more generally,” he said.
“On net, oil shocks tend to weigh on output in the U.S. economy, but by far less than in the 1970s,” he added.
moved lower in reaction to Powell’s remarks. The yield on the 10-year Treasury note
rose to 2.29% following his speech.
Powell downplayed the yield curve as a good indicator of the outlook for the economy, especially to comparison of the 2-year Treasury note yield with the yield of the 10-year Treasury note. He said he focused instead on the first 18 months of the curve.
Some economists believe the rate on the 2-year yield will rise above the 10-year rate, an inversion of the yield curve, something that is seen as a sign of a pending economic recession.