Fed chief Jerome Powell pivots toward 50 bps interest rate hikes

Jerome Powell is taking direct aim at strong demand that the central bank wants to cool

US Federal Reserve Chair Jerome Powell outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half percentage-point interest-rate increases while describing the labor market as overheated.

“I would say that 50 basis points will be on the table for the May meeting,” Powell said at an IMF-hosted panel on Thursday in Washington that he shared with European Central Bank President Christine Lagarde and other officials. He said demand for workers is “too hot – you know, it is unsustainably hot.”

The Fed chief is taking direct aim at strong demand that the central bank wants to cool. It’s a strategy that bears considerable risk for US workers and the economy’s overall growth prospects in months ahead, as well as for the Fed itself in a year of midterm congressional elections, with inflation a major concern among ordinary Americans.

“This is going to be a very close call on whether we get a recession or not,” said Ethan Harris, head of global economics at Bank of America Securities. “They have to get monetary policy into tight territory, and they probably need to get some kind of rise in the unemployment rate.”

Powell also reinforced expectations for another half-point increase in June, by citing minutes from last month’s policy meeting that said many officials had noted “one or more” 50 basis-point hikes could be appropriate to curb the hottest inflation in four decades. “There’s something in the idea of front-end loading” moves if appropriate, Powell said –“so that points in the direction of 50 basis points being on the table.” Investors are betting on half-point increases in May, June and possibly July. Rising yields in turn have unsettled the stock market, with S&P 500 Index closing down 1.5 per cent Thursday.