Fed Committed to Tightening Path to Rein in Inflation, Powell Says

Fed Committed to Tightening Path to Rein in Inflation, Powell Says

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Stock Markets2 hours ago (May 17, 2022 02:48PM ET)

Fed Committed to Tightening Path to Rein in Inflation, Powell Says© Reuters.

By Yasin Ebrahim

Investing.com — Federal Reserve Chairman Jerome Powell said Tuesday there was broad support among Fed members to raise the Fed’s benchmark rate by half a percentage point at the next two meetings to curb inflation.  

While the Fed can’t control the supply issues driving up inflation, the U.S. central bank “has a job to do” to reduce demand, Powell acknowledged in a WSJ interview.

“There is an imbalance in the economy broadly, between demand and supply,” Powell said. “We can’t really affect supply…our policies don’t don’t work on [supply issues], but we have a job to do on demand,” Powell said. 

Restoring balance in the labor market by curtailing growth will be key to restoring price stability, which Powell described as the “bed rock” of the economy. 

“I would, for example, point to the labor market where there’s more demand for workers than there are people available to work by a substantial margin. Wages are moving up, which is a great thing, but they’re moving up at a pace that is not consistent with 2% inflation,” Powell added.

Earlier this week, Goldman Sachs said it believes that the current pace of rate hikes priced into the market was enough to restore balance in the labor market as financial conditions continue to tighten. 

“We think that the rate hikes that are currently priced into financial conditions are in the ballpark of what is ultimately needed to restore balance to the labor market and cool wage and price pressures,” Goldman Sachs said in a note. “We therefore expect that the recent tightening in financial conditions will persist, in part because we think the Fed will deliver on what is priced.”

The Fed chief said the U.S. central bank was prepared to stay the course on rate hikes until it was clear that inflation was abating. 

“We need to see inflation coming down in a convincing way…until we see that, we will keep going [with rate hikes],” Powell said, adding that the U.S. central bank “wouldn’t hesitate” to go beyond the neutral rate — the rate that neither slows or grows the economy — if needed to achieve price stability.   

Many fear, however, the path to reducing growth just enough to rein in inflation without tipping the economy into recession is narrowing. 

But Powell believes a “soft-ish” landing remains a possibility, supported by a strong labor market that could, if growth slows, withstand a rise in the unemployment rate.

“You’d still have a quite a strong labor market. If the unemployment rate were to move up a few ticks…there’s a number of plausible paths to having a soft-ish landing,” Powell said. “Achieving price stability is an unconditional need and something we have to do because really the economy doesn’t work for workers, for businesses or anybody without price stability.”

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