Powell Strikes a Hawkish Tone

Federal Reserve Chairman Jerome Powell spoke today before an economic policy conference. Powell sounded markedly more willing to use interest rates to combat inflation.

In particular, he said that the Fed could start using 0.5% rate increases. Before last week’s increase, which was the first in more than three years, there had been some speculation that the Fed would increase by 0.5%. Ultimately, the Fed raised rates by just 0.25%.

I think the Fed is making two errors. The first is that the inflation threat is more serious than they realize. Their latest economic projections are evidence of that. The other issue is the threat of an economic slowdown, though not necessarily a recession.

Finally, what will it take to restore price stability? The ultimate responsibility for price stability rests with the Federal Reserve. Price stability is essential if we are going to have another sustained period of strong labor market conditions. I believe that the policy approach that I have laid out is well suited to achieving this outcome. 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. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.

That’s good to hear that they are aware of the problem. However, too often Fed chairs rely on tough talk rather than concrete action. Powell also said that the Fed could soon start unwinding its ginormous balance.

Posted by on March 21st, 2022 at 2:32 pm


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