Reducing inflation may require ‘some pain’

Federal Reserve Chairman Jerome Powell said Tuesday that the central bank will continue to raise short-term interest rates – which will probably slow down economic activity – until “clear and credible evidence” that inflation is coming down.

“We’re going to get to that point and there’s no doubt about it,” Powell said at an event in the Wall Street Journal.

In the face of unprecedented inflation since the 1980s, the Fed has increased the cost of short-term debt in an effort to reduce costs and investments. The Fed’s preferred measure of inflation rose 6.6% year-on-year in March, exceeding the central bank’s 2% target.

“There may be some pain involved in restoring price stability, but we think we can maintain a strong labor market,” Powell said. The unemployment rate in April was at an all-time low of 3.8%.

After keeping the federal funds rate close to zero since the onset of the epidemic, the Fed went on to raise rates by 0.25% in March this year. In May, the Fed raised its rate by 0.50% – its biggest move in a single meeting since May 2000.

Powell said Tuesday that the next two policy-making meetings had “broad support” for an additional 0.50% move. Other Fed officials (such as his colleagues in Cleveland, Atlanta and St. Louis) have similarly expressed support for the plan, which would raise the federal funds rate to between 1.75% and 2.00% by the end of July.

“This is a summary of a prediction or statement of forward guidance that we are actually going to make,” Powell warned. The Fed chief said the picture of inflation could be further clouded by Russia’s aggression in Ukraine and the economic shutdown in China.

Soft landing?

Flexibility may be required for the central bank. If inflation does not slow down quickly enough, Powell promises to consider “moving more aggressively” on the rate. However, he added that if inflation eases faster than expected, the Fed may consider moving at a slower pace.

The goal is to keep the epidemic alive without causing a wave of job losses and a sudden collapse in economic activity. For the Fed, a “soft landing” would be a slight slowdown in U.S. economic growth and an unemployment rate that would keep inflation low for just a few ticks.

Powell said earlier this month that he felt there was a better chance of getting a “soft – or soft-ish” result because it increases the rate. On Tuesday, the Fed Chair used an airplane analogy to explain its point.

“Sometimes the landing is just perfect, sometimes it’s a little awkward. It’s still a good landing, you don’t even notice it, ”Powell said.

The Fed’s next policy meeting will be held on June 14 and 15.

Brian Cheung is a reporter covering Yahoo Finance’s Fed, the economy and banking. You can follow him on Twitter bcheungz.

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