‘Inflation is way too high’: Powell lashes out at price spikes

Interest rates this year could reach their highest level since the Wall Street crash of 2008 if rising prices continue. That prospect has sent stocks plummeting this year and pushed mortgage rates above 5 percent for the first time in a decade. In a measure of how nervous investors have become, stocks rose after Fed Chair Jerome Powell said the central bank doesn’t expect to hike rates in any bigger increments — not yet. Still, he said, more big raises are “on the table” for the next few sessions.

“Inflation is way too high and we understand the distress it’s causing,” Powell told reporters after the meeting.

Raising the cost of borrowing for the remainder of 2022 increases the likelihood of the US slipping into a recession during an election year, an event that would further anger voters already angry at President Joe Biden’s handling of the economy.

Powell said the Fed could avoid that outcome. “We have a good chance of restoring price stability without a recession, without a severe downturn and without much higher unemployment,” he said. “I see a strong economy now. I see a very strong job market.”

He acknowledged the task would be challenging, especially if supply chain disruptions continue to plague the global economy. But he said the Fed stands ready to do whatever it takes to get prices back on track, adding: “We are taking quick steps to bring them back down.”

“I have no doubt that the Fed will hit its inflation target in the next two or three years,” said Gus Faucher, chief economist at PNC Financial, the country’s ninth-largest bank. “We may not like the result.”

The Fed’s rate hike campaign marks a new era for the economy. The Fed’s easy-money policies have enriched many Americans over the years, helping to send stock prices into the stratosphere and boosting home valuations a record-breaking $43 trillionand provided ordinary consumers with extra money to spend through lower borrowing costs and home refinance.

The end of these good times has shaken consumer confidence and cast unelected Fed policymakers in an uncomfortable light ahead of the midterm congressional elections as they switch into anti-inflation mode. Critics of the Republican Fed – and some prominent Democrats – have even blamed the central bank itself for allowing inflation to run unchecked for so long.

“The Fed just doesn’t like doing this in an election year,” said Charles Calomiris, a Columbia Business School professor who served as chief economist at a major banking regulator under former President Donald Trump. “It’s very awkward.”

It is not yet clear how far the Fed will go. The central bank still sees the possibility that inflation could cool off somewhat on its own as supply chain tightening eases and Congressional spending eases. At best, the Fed could raise rates from their extremely low levels without having to go much further and rein in the economy.

But professional forecasters generally expect the central bank will need to tighten growth more to lower spending and ultimately inflation, something Powell said they would not hesitate to do if necessary. Some economists estimate that the Fed will need to raise rates much more than they currently forecast to even get to a point where it isn’t contributing to price spikes itself.

“The Fed missed its chance without tightening a recession,” Calomiris said. “The longer they hesitate and pretend they still have that chance, the harder they will do it.”

After four decades in which the Fed’s interest rate almost never fell below 2.5 percent, the economy has now experienced more than a dozen years in which it has never climbed above that point. After the move on Wednesday, the course is between 0.75 percent and 1 percent.

Now the central bank is expected to continue raising borrowing costs at each of its rate-setting meetings, which take place roughly every six weeks, for the remainder of the year. It will also be on the lookout for signs that it is hitting the brakes too hard.

“With inflation at a 40-year high, it’s hard to imagine the Fed exiting anytime soon,” said Beth Ann Bovino, chief US economist at S&P Global Ratings. “It seems like they’re ready to step on the accelerator.”

Fears of a Fed-induced recession in 2023 have been growing, especially when mixed with the economic fallout from Russia’s invasion of Ukraine and renewed lockdowns in China, both of which the central bank acknowledged in its announcement are exacerbating problems in the supply chain would likely worsen. But some Fed watchers are hoping it will be able to slow the economy without leading to a full contraction.

“It’s too early to say we must have a recession,” said Krishna Guha, vice chairman of Evercore ISI and a former New York Fed official. But the process will still not be gentle, he added. “When we say a soft landing, we don’t really mean a super soft landing. We mean a bumpy normalization.”

‘Inflation is way too high’: Powell lashes out at price spikes

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