Federal Reserve Chair Jerome Powell is taking direct aim at strong demand that the central bank wants to cool. It’s a strategy that bears considerable risk for U.S. workers and the economy’s overall growth prospects in months ahead, as well as for the Fed itself in a year of midterm congressional elections, with inflation a major concern among ordinary Americans.
The Fed chief outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half percentage-point interest-rate increases while describing the labor market as overheated.
“I would say that 50 basis points will be on the table for the May meeting,” Powell said at an IMF-hosted panel on Thursday in Washington that he shared with European Central Bank President Christine Lagarde and other officials. He said demand for workers is too hot “you know, it is unsustainably hot.”
Powell also reinforced expectations for another half-point increase in June, by citing minutes from last month’s policy meeting that said many officials had noted “one or more” 50 basis-point hikes could be appropriate to curb the hottest inflation in four decades.
To some, it’s too little, too late. Critics say that U.S. central bankers are caught in a policy bind of their own making. Prices began to accelerate in the fourth quarter, when employers shrugged at the latest wave of the coronavirus and added more than a half-million workers each month.
Wage gains picked up and demand strengthened, broadening inflation pressures throughout the economy even as the Fed continued to add stimulus by holding rates near zero and buying bonds.
Policymakers last year wanted to avoid pre-emptive tightening, but the combination of fiscal stimulus, monetary support, and bounce-back in demand put them behind inflation pressures that were well underway.
Russia’s invasion of Ukraine will likely raise food and energy prices further. The consumer price index rose 8.5% in March from a year earlier, the most since 1981; the Fed’s target is based on a separate measure known as the personal consumption expenditures price index, which rose 6.4% for the year through February.
Another uncertainty in policy strategy is what happens to financial conditions when officials start running assets off their balance sheet. Fed officials have signaled this process will be announced in May, with the runoff stepping up to $95 billion a month combined for Treasuries and mortgage-backed securities.
