Jay Powell, Chairman of the Federal Reserve, on Wednesday declined to rule out a string of more aggressive rate hikes than markets expected but he confirmed the first hike would be in place in September. Three.
Powell dodged a question about whether raised could raise rates at every next meeting this year – the number should increase to seven by 2022 – instead of saying the central bank will be “modest and nimble” and “guided by the data.” “.
Last month, central bank policymakers released forecasts implying only three rate hikes this year.
Powell’s hawkish stance during the Fed’s post-January press conference triggered a sharp sell-off in the stock market. The S&P 500 index rose 2.2% to close 0.1% lower. The tech-heavy Nasdaq Composite closed flat, reversing gains to 3.4% earlier in the session.
Yields on two-year Treasuries, changed by interest rate expectations, rose to 1.16% – the highest level since February 2020.
Powell said the economy is much stronger now than it was in 2015, when the central bank last started its rate hike cycle, noting soaring inflation was “much higher” than its 2% target. The Fed and the labor market are strong.
“These differences could have important implications for the speed at which policy adjustment is appropriate,” he said.
“I think there is quite a bit of room to raise rates without threatening the labor market,” he added.
Powell also declined to say whether the Fed would consider raising rates by half a percentage point at some point this year, as opposed to quarterly increases that have become the norm. It’s been more than two decades since the central bank last raised interest rates by more than 0.25%.
He stressed that policymakers have not yet “made these decisions” but again pointed to the strength of the economy. “If you look back. . . In 2015, 16, 17, 18, when we raised interest rates, inflation was very close to 2%, even lower,” he said, also referencing the low unemployment rate and gross national product. America’s domestic market grew strongly.
“Powell doesn’t rule out the idea of hiking at every meeting instead of every other one,” said Eric Winograd, senior economist at AllianceBerntein. He does not rule out the idea of a 50 basis point increase. The stock market turned upside down just as Powell said he thinks the labor market is strong enough to withstand multiple rate hikes.”
Winograd described the Fed meeting as “very hawkish”, adding: “They did everything they could except hire a messenger in the sky with the message.”
Meanwhile, Powell essentially confirmed that the rate hike cycle will begin in March. “The committee intends to increase the federal funds rate at its March meeting assuming the conditions are right to do so,” he said.
The central bank has pledged to keep its key policy rate at the bottom – where it has been since the outbreak of the pandemic – until maximum employment is reached and inflationary average 2% over time.
The inflation target was completed last year, and the Fed on Wednesday noted that the unemployment rate, now hovering at just under 4%, had fallen “significantly”.
“I would say that most FOMC participants agree that labor market conditions are consistent with maximum employment. . . and that’s my personal view,” said Powell.
The Fed also confirmed that it will stop its bond-buying program so that the buying and selling closes in early March.
The FOMC and other regional branch presidents last month recorded increases of three-quarters in 2022, with three more in 2023 and another two in 2024.
However, in recent weeks, some Fed officials and Wall Street economists have said a more aggressive rate hike cycle may be needed with four or more hikes this year. Powell did little to rebut their views on Wednesday.
Traders in the overnight funding markets, who were pricing in a quarter rate hike in March, began to return to expectations that the Fed could raise rates more than four times this year.
Debate is also ongoing about how the Fed will shrink balance sheet of about $9 billion, after policymakers held the first significant discussions about central bank holdings last month. They took a closer look at this week’s meeting and laid out a set of principles for an approach to downsizing the balance sheet.
