Home » Powell’s Fed Set to Go Big and Keep Going Until Inflation Tamed

Powell’s Fed Set to Go Big and Keep Going Until Inflation Tamed

Jerome Powell doesn’t like to bless banks and financial markets, but
he could shift the needle this week on how high investors expect the
Federal Reserve to raise interest rates to cool overheated prices.

The Fed chair and his colleagues want to lift rates expeditiously to a
neutral level this year that neither stimulates nor restrains growth
around 2.5%. And that slows the pace of tightening. But in crises
central banks that pause typically loses the forces they’re battling,
be it spreading financial panic or broadening inflation. gain more
momentum. You don’t pause along the way in an inflation fight, said
former Fed Governor Lawrence Meyer, who now runs policy analysis firm
LH Meyer, you do look around, but there is an urgency of moving beyond
a neutral rate of interest.

US central bankers don’t want to trigger a recession and Powell has
voiced confidence in the Fed’s ability to pull off a soft landing that
brings inflation toward its 2% target without stalling the economy.
But he has also prioritized price stability. If we determined that we
need to tighten beyond common measures of neutral and into a more
restrictive stance we will do that, Powell said on March 21.

He publicly backed front loading policy tightening at April 21 remarks
that helped cement expectations for a half-point hike when officials
conclude their two-day meeting Wednesday, followed by at least that
larger move in June. Minutes of their march gathering also signaled
the committee will likely agree to start shrinking their $9 trillion
balance sheet and may quickly move to a maximum run-off base of $95
billion a month. Powell has seen slowing rate hikes after May or June
frontloading.

Labor costs spending keep the heat on fed for aggressive tightening.
Treasury yields rise and record streak is fed bets regain focus fed
dashes cold water on shock and Dawn hike of 75 basis points. Having
already provided a lot of clues for what to expect. Most of the new
information will come via pals post-meeting press conference at 2:30
pm in Washington, his first to be held in person since the pandemic
began. Powell will have just spent two days gauging the mood of his
colleagues. If he comes out and signals policy may require a more
restrictive stance meaning above its neutral setting, it would be a
significant shift. The market consensus currently shows rates peaking
at about 3.4% But that is above the median fed forecast that was
updated in March.

The Fed has very little room to underdeliver on policy restrained sit
down Husseini global rate strategist at Columbia Threadneedle. They
have to say they’re willing to risk tipping the economy into recession
to signal credibility on inflation. Fed forecasts for March show five
officials projecting rates above 3% in 2023 and 2024 to get inflation
moving back toward their target. That was more hawkish than the median
official who saw rates at 2.8% in both years, but it’s plausible that
more policymakers have joined those ranks given incoming economic
data.

Economists at Deutsche Bank argued the Fed will have to raise rates
much more aggressively willing to the 5% or 6% range to curb
inflation, leading to a deeper recession next year. First-quarter
gross domestic product numbers released Thursday showed solid
underlying demand with real final sales to domestic purchasers
accelerating to a 2.6% annual rate, capacity utilization is rising and
capital spending is holding up the employment cost index an important
indicator of total compensation costs watched by Powell rose 4.5% from
a year earlier, a game that is likely to underpin demand and possibly
sustained inflation pressures. And the jobs market remains tight.
payrolls rose by 385,000 in April, according to the median estimate in
a Bloomberg News survey.

The monthly employment report will be published on May 6. The recovery
continues to be robust. Visa incorporated chairman and chief executive
Alfred Kelly told analysts on April 26th. At this stage in terms of
volumes, we have seen no noticeable impact due to inflation supply
chain issues or the war in Ukraine. For central bankers, this is all
good news except for one thing. It has been accompanied by rising
inflation rates and drifts up in some long-run inflation expectation
measures.

The feds preferred price measure rose 6.6% in March more than three
times our goal, a University of Michigan survey of the expected change
in prices for the next five to 10 years has averaged 3% for the past
12 months versus 2.7% for the last expansion and a New York Fed survey
of three years ahead inflation expectations average 3.6% in the first
quarter versus 2.9% in the first quarter of 2019. Underlying
inflation, all of the measures are telling us underlying inflation is
not where it should be said Conrad Quadros, senior economic advisor, at
Brienne capital, the eventual point they need to get to rein in
inflation is probably going to have to be more restrictive than our
current estimates of 2.8%.

The fed’s narrative about moving cautiously once they get rates up to
around 2.5% also reflect their high uncertainty. Russia’s invasion of
Ukraine and China’s round of virus lockdowns could both slow global
growth and further snarl supply chains creating more scarcity and
higher prices. At the same time, slowing growth in China and Europe
could create disinflationary forces. And a while the chief us
economist for Bloomberg economics said just a 4% decline in the level
of GDP in China can lead to a 30% reduction in oil and commodity
prices, potentially offsetting the inflationary effects of Europe’s
potential oil embargo on Russia, an easing of raw materials prices may
seduce the committee to pause as they approach a 2.5% policy rate
later this year, Wang said.

But wage pressures are likely to continue to grow, at least in nominal
terms, she said, and sustained core service price increases. The path
to a soft landing is very narrow, Wang said, and depends on faster
labor force growth to help satisfy the demand for workers which may be
unlikely. The Fed will have to keep hiking and cannot afford to stop
until they are closer to 4%.

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