Raising rates to curb inflation ‘will not be painless’, warns Fed chief Jerome Powell

Jerome Powell a été reconduit pour un deuxième mandat à la tête de la Fed

The rise in key rates initiated in March by the Fed, the American central bank, to bring inflation back to its highest level since the beginning of the 1980s at 2%, its target objective, will shake up, because this traditional means of combating rising prices could weigh on economic growth and employment.

“It won’t come without pain,” Fed Chairman Jerome Powell said Thursday in an interview with Marketplace, the daily business program on public radio NPR.

Rates between 0.75% and 1% today

After a rate hike of a quarter of a percentage point in March, then of a half point on May 4 (the biggest hike in more than 20 years), key rates are now between 0.75 and 1 .00%. And further increases are to be expected until the end of the year. Objective: Slow down demand, while inflation rose in March to 6.6% over one year, its highest level since 1982, according to the PCE index, favored by the American Central Bank.

But, the one who has just been reappointed for a second term by the American Senate believes that, “the most painful thing would be to fail to counter it and for inflation to remain entrenched in the economy at high levels”. A speech different from those held so far. Indeed, Jerome Powell had so far said he was confident that the Fed would succeed in slowing inflation without slowing down the economy. “We have the tools”he nevertheless hammered.

“Our goal, of course, is to bring inflation down to 2% without the economy going into recession, or maintaining a fairly strong labor market,” he said. But things could turn out to be more complicated than initially anticipated: “Whether we can execute a soft landing or not, may actually depend on factors beyond our control.”

“A soft landing just means getting inflation down to 2% while maintaining a strong labor market. And that’s pretty hard to achieve right now.”he admitted.

What future increases?

It remains to be seen what the magnitude of the next increases will be.

“If the economy evolves roughly as expected, it would be appropriate for there to be additional hikes of 50 basis points (half a point, editor’s note) at the next two meetings”indicated Jerome Powell, specifying that “if things go better than expected, we are ready to do less. If it is worse than expected, we are ready to do more”.

Going further than half a point seems risky for Raphael Bostic, the president of the Atlanta antenna. For the next two or three monetary policy meetings, the latter recommended Monday to stick to increases of half a point to have time to assess their effect on the economy and inflation before deciding whether further increases are needed.

The 50 basis point hike “is already a rather aggressive decision”, he told Bloomberg. “I don’t think we need to act any more aggressively,” he added, appearing to rule out a 75 basis point hike as expected by the markets.

Jerome Powell, said on Wednesday that three-quarter point rate hikes were not “actively” considered by members of the Federal Open Market Committee (FOMC). Many investors and economists believe, however, that the Fed will have no choice but to raise its rates more strongly given the current level of inflation.

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Several confirmed positions

Reappointed by the Senate, Jerome Powell, a 69-year-old former lawyer and banker, governor of the Fed since 2012, was appointed head of the institution in 2018 by Donald Trump. He then succeeded Janet Yellen, who has since become Joe Biden’s Treasury Secretary. The Senate had already confirmed Lael Brainard as vice-president as well as, as governors, Philip Jefferson and Lisa Cook, who became the first black woman to hold this position, despite opposition from Republicans. The equality of votes between the two camps had even required the vote of the vice-president of the United States, Kamala Harris, to achieve a majority. Elected officials have yet to decide on the appointment of Michael Barr to the post of vice-president for banking regulation, after Sarah Bloom Raskin, initially chosen, had given up, for lack of sufficient support. The decision to offer Jerome Powell a second four-year term was announced in November by Joe Biden. The appointment of the chairman of the Fed is, in terms of the economy, one of the most important decisions of the mandate of the president of the United States.