After insisting that the US inflation rate is transitory, Fed Chairman Jerome Powell is now singing a new tune. The Federal Reserve chairman is now promising tough action to battle higher prices.
Powell Says US Inflation Rate Is Much Too High
On Monday, Federal Reserve Chairman Jerome Powell said that inflation is now jeopardizing America’s strong economic recovery. “The labor market is very strong, and inflation is much too high,” Powell said.
He delivered prepared remarks for the National Association for Business Economics. In addition, Powell’s speech came a few days after the Federal Reserve raised interest rates a quarter point. This is the agency’s first interest rate hike in over three years.
The quarter point interest is not last, by all means. The battle to bring down inflation will entail a series of incremental rate hikes until they bring inflation down. In fact, Powell indicated a willingness to increase the rate hikes if necessary.
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Powell Vows a Return To Price Stability
“We will take the necessary steps to ensure a return to price stability,” Powell said during the event. He assured the audience that the Fed will raise interest rates by more than 25 basis points.
In contrast, if the Fed determines that if they need to tighten beyond the agreed measures, they will do so.
The Fed uses basis points to determine the interest rate. A single basis point unit is equal to 0.01%. Federal Open Market Committee officials said that they will time a rate hike during their six remaining meetings this year.
Originally, they will increase rates by 25 basis points every time. However, markets see a 50% chance that the hike rate for the next meeting in May will be 50 basis points.
US Inflation Rate At 7.9%, Highest in 40 Years
As a result of Powell’s statements, stocks went down as Treasury yields rose. As usual, Powell pointed to the COVID pandemic as the major factor in the US inflation rate being high.
The flood of stimulus money led to strong demand for goods and services. However, limitations caused by the shutdowns meant that businesses could not produce enough supplies.
Ultimately, Powell conceded that the Federal Reserve seriously underestimated how long these pressures will last.
Now, Americans are living with the effect of a high US inflation rate. Last February, the Labor Department reported that the US inflation rate stood at 7.9% on a 12-month basis.
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This is the highest rate recorded in over forty years. Prices are now 5.2% higher compared to prices a year ago. This is more than double the Fed’s projection of 2%.
Ending Easy Money Policies
Powell said he believes that inflation will fall back into ranges the Fed is comfortable with. However, spending must stop. He added that at this point, it’s time to shelve the historically easy monetary policies they enacted.
“We will be looking to actual progress on these issues and not assuming significant near-term supply-side relief,” he added.
The Russian war with Ukraine is also adding to supply chain and inflation woes. With the outcome of this conflict still unclear, policymakers will need to stay aware.
Higher inflation can push longer-term expectations higher. This can push the agency to increase the rate hike and adjust as necessary.
Watch the WION video reporting that Federal Jerome Powell thinks that more aggressive rate hikes if needed as the US battles with too-high inflation:
What can you say about Jerome Powell’s statement that the US inflation rate is much higher right now? Is this an admission that they made the wrong assessment on inflation in the past two years?
Tell us what you think. Share your comments below.