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Powell Sets Aggressive Path and Stated Rates will not Induce Recession

In: Finance, Forex

On Wednesday, the Fed raised interest rates by 50 basis points for the first time since 2000 and Powell said similar moves were on the table for June and July. Still, investors took heart that he also pushed back against a larger 75 basis-point increase, with stocks notching their largest rally on the day of a Fed meeting in a decade.

“I’d like to take this opportunity to speak directly to the American people,” Powell said at the start of a post-meeting press conference in Washington, held in person for the first time since the pandemic began. “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down.”

Federal Reserve Chair Jerome Powell assured Americans that policy makers will do what it takes to curb surging inflation, acknowledging this could cause “some pain” as the U.S. central bank deployed its most powerful policy tightening in decades.

Fed officials — who also decided to start reducing their holdings of Treasuries and mortgage-backed securities next month — are trying to curb the hottest inflation since the early 1980s. Back then, Chair Paul Volcker raised rates as high as 20% and crushed both inflation and the broader economy in the process.

The Fed’s hope this time around is that the combination of rising borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation, though Powell implied this might not be possible without hurting growth.

The Fed chief and his colleagues have faced mounting criticism they were slow to confront inflation, which in March reached a 40-year high of 8.5%, based on the Labor Department’s consumer price index. Powell on Wednesday said the central bank has been adapting as the data changed, and will continue to do so.

Powell said half-point increases were on the table for the next two policy meetings and suggested that officials could then throttle their hiking pace to quarter-point increases starting in September, provided price pressures showed signs of cooling. Fed officials say they want to raise rates until they reach the level that neither speeds up not slows down the economy — known as the neutral rate.

His wager is that by cooling demand with a steady march to higher interest rates, price increases will be kept in check. But it is also a risky strategy, and one that may become more dramatic later in the year if inflation doesn’t settle down.

Russia’s invasion of Ukraine and ongoing Covid-driven lockdowns in China are continuing to impact global supply chains, which the Fed acknowledged in its post-meeting statement. But Powell emphasized that the Fed doesn’t have the tools to fight supply-side demand, and is instead trying to use its tools to rebalance a too-hot labor market.

Powell framed the Fed’s aggressive plan to rein in inflation as a way to ultimately help workers whose wage gains this year have been eroded by price increases in essentials like food, gasoline and rent. Real wages, which take into account inflation, have decreased for 12 straight months.

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