Jay Powell, chair of the Federal Reserve, on Wednesday refused to rule out a more aggressive string of interest rate rises than markets had been expecting as he all but confirmed the first increase would be implemented in March.
Powell dodged a question on whether the Fed could raise rates at every subsequent meeting this year — which would amount to seven increases in 2022 — instead saying that the central bank would be “humble and nimble” and “guided by the data”.
Last month, the central bank’s policymakers released projections that implied just three rate rises this year.
Powell’s hawkish stance at a press conference following the Fed’s January meeting sparked a sharp stock market sell-off. The S&P 500 gave up a 2.2 per cent gain to close 0.1 per cent lower. The technology-heavy Nasdaq Composite closed flat, reversing a rally of as much as 3.4 per cent earlier in the trading session.
The yield on the two-year Treasury note, which moves with interest rate expectations, climbed to 1.16 per cent — its highest level since February 2020.
Powell said the economy was much stronger now than in 2015, when the central bank last embarked on a rate rising cycle, noting soaring inflation that was “well above” the Fed’s 2 per cent target and a robust labour market.
“These differences are likely to have important implications for the appropriate pace of policy adjustment,” he said.
“I think there’s quite a bit of room to raise interest rates without threatening the labour market,” he added.
Powell also declined to say whether Fed would consider raising rates by half a percentage point at some point this year, as opposed to the quarter point increases that have become the norm. It is more than two decades since the central bank last raised rates by more than 0.25 per cent.
He stressed that policymakers had not yet “made these decisions” but again pointed to the strength of the economy. “If you look back to . . . 2015, 16, 17, 18, when we were raising rates, inflation was very close to 2 per cent, even below,” he said, as he also reference the low unemployment rate and strong growth in US gross domestic product.
Eric Winograd, senior economist at AllianceBernstein, said: “Powell didn’t rule out the idea of hiking at every meeting instead of every other. He didn’t rule out the idea of a 50 basis point hike. The stock market rolled over right as Powell said he thinks the labour market is strong enough to withstand multiple rate hikes.”
Winograd described the Fed meeting as “very hawkish”, adding: “They did everything they could except hire a skywriter with the message.”
Meanwhile, Powell essentially confirmed that the rate rising cycle will begin in March. “The committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so,” he said.
The central bank had pledged to keep its main policy rate at rock-bottom levels — where it has been since the onset of the pandemic — until achieving maximum employment and inflation that averages 2 per cent over time.
The inflation goal was fulfilled last year, and the Fed on Wednesday noted that the unemployment rate, which now hovers at just below 4 per cent, had declined “substantially”.
“I would say that most FOMC participants agree that labour market conditions are consistent with maximum employment . . . and that is my personal view,” Powell said.
The Fed also confirmed it will wind down its bond-buying programme so that the purchases end in early March.
The FOMC and other regional branch presidents last month pencilled in three quarter-point increases in 2022, with three more in 2023 and another two in 2024.
However, in recent weeks some Fed officials and Wall Street economists have said a more aggressive rate rising cycle may be needed with four or more increases this year. Powell did little to counter their views on Wednesday.
Traders in overnight funding markets, who were pricing in a quarter-point interest rate rise in March, began to dial up their expectations that the Fed could lift interest rates more than four times this year.
Debate is also under way about how the Fed will shrink its roughly $9tn balance sheet, after policymakers held their first substantive discussions on the central bank’s holdings last month. They had further deliberations at this week’s meeting and released a set of principles on the approach to shrinking the size of its balance sheet.