On Wednesday, Federal Reserve Chairman Jerome Powell strongly addressed the issue of inflation during a forum. He announced his anticipation for a series of interest rate hikes, possibly undertaken at a faster-than-usual rate.
Powell, while participating in a monetary policy discussion in Sintra, Portugal, suggested, “We foresee further constraints ahead”. He attributed this to a robust labor market.
This viewpoint echoes the sentiment expressed by other policymakers at their June meeting. Here they communicated the potential for an additional half percentage point in increases by the conclusion of 2023.
Assuming an increase of a quarter point per meeting, this implies two more rate hikes. Powell had previously suggested these might occur at alternate meetings, however, he amended this on Wednesday to say this may not be the case, depending on incoming data.
Since March 2022, the Fed has consistently raised rates at each meeting, including four back-to-back three-quarter point increases, prior to pausing in June.
Powell hasn't ruled out consecutive increases, stating, “I wouldn't exclude the possibility of rate hikes at back-to-back meetings”. The Q&A session was part of a forum backed by the European Central Bank.
As Powell spoke, the market responded negatively, with the Dow Jones Industrial Average dropping by over 120 points.
The Fed is currently of the opinion that the ten consecutive rate increases haven't yet fully impacted the economy. As a result, they're unsure if the policy meets the "sufficiently restrictive" criteria required to lower inflation to the Fed's 2% target.
A majority of economists anticipate these rate hikes will eventually lead to at least a minor U.S. recession.
Powell admitted a downturn could be on the horizon, saying, “There's a significant chance of a downturn”, although he was quick to add, “It's not the most probable outcome, but it's certainly feasible.”
When questioned about banking strains, Powell acknowledged that the issues leading to the closure of Silicon Valley Bank and two other institutions in March did factor into the previous meeting's discussions.
Despite Powell's assertion that the overall U.S. banking sector remains robust, he stressed the need for the Fed to remain aware of potential issues with credit availability. He noted recent studies indicating a tightening in standards and a decline in loan demand.
Powell said, “Bank credit availability can decline slightly after a delay. So, we're closely observing to see if that materializes.”
Other central bankers at the forum also expressed the urgency to curb inflation.
Christine Lagarde, ECB President, stated, "We still have a long way to go", and suggested a rate hike in July was highly likely. Bank of Japan's Kazuo Ueda hinted at tightening its loose policy if inflation doesn't relent, while Bank of England's Andrew Bailey emphasized the need to lower prices and ruled out increasing the 2% inflation target.
Powell acknowledged the stubborn nature of inflation saying, "Inflation has proven to be more enduring than we expected and not less", adding, "Of course, if the tide turns, that would be welcome. But we don't anticipate that happening soon.”