“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability,” Fed chair Jerome Powell said on Monday before the National Association for Business Economics in Washington.
Flagging inflation as “too high”, Mr Powell spoke of the “significant hardships” this could impose on those least able to meet the higher costs of essentials like food, housing and transport.
He stressed that past recessions were not caused by excessive tightening of monetary policy, noting the possibility that the central bank could lift rates in 50 basis point increments.
“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,” Mr Powell said.
Touching on previous periods of economic contractions, the Fed chair said that while recessions chronologically followed the conclusion of a tightening cycle, “the recessions were not apparently due to excessive tightening of monetary policy.”
“For example, the tightening from 2015 to 2019 was followed by the pandemic-induced recession,” he explained.
“Monetary policy is often said to be a blunt instrument, not capable of surgical precision. My colleagues and I will do our very best to succeed in this challenging task. It is worth noting that today the economy is very strong and is well positioned to handle tighter monetary policy.”
Earlier this month, the Federal Reserve kicked off its hiking cycle with a quarter-point increase – the first since 2018.
While economists did expect this decision, what surprised was the Fed’s stated goal to get the fed funds rate to 2.8 per cent by the end of 2023.
According to Ben Powell, APAC chief investment strategist at BlackRock, “this level is in the territory of destroying growth and employment”.
He criticised the Fed’s approach, pointing to impediments to employment after the Fed chair himself emphasised the extreme tightness of the labour market.
“The Fed’s latest economic projections pencil in persistently high inflation but low unemployment – even as it has called current labour conditions tight.
“We believe this means the Fed either doesn’t realise its rate path’s cost to employment or – more likely – that it shows its true intention: to live with inflation,” BlackRock’s investment strategist said.
