If there were any doubts about the Federal Reserve’s more “hawkish” approach in 2022, Chairman Jerome Powell put those to rest this week.
Powell, on March 21, came out swinging against U.S. inflation, saying that policymakers were prepared to use the tools at their disposal faster and more furiously than had previously been expected. Federal Reserve officials are up against inflation soaring at its swiftest pace since the early eighties.
Describing the Federal Reserve’s willingness to act “expeditiously” and “aggressively” on rates, the hawkish shift in Powell’s tone came amid criticism that his response to rising consumer prices was too little, too late.
Days after lifting short-term interest rates by a quarter-point, from nearly zero to a range of 0.25-0.5%, the Federal Reserve chairman dropped the hammer. The agency is not opposed to 50-basis-point moves to thwart inflation — even at the expense of future economic growth and jobs.
Powell stated, “We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the Federal Funds rate by more than (0.25) at a meeting or meetings, we will do so.”
The chairman has admitted that the situation is fluid, revealing that outlooks on interest rates and inflation are more or less transitory. Nevertheless, he has attached an inflation target of 2.7% by year-end 2023 as the rate hikes spill over into the following year.
Before last week, Fed officials had not raised short-term interest rates since 2018, while a 50-basis-point increase has not seen the light of day in over 20 years.
Aggressive changes to the benchmark rate would make their way into consumer borrowing rates for vehicles, credit cards, and real estate, for example.
Hail to the Federal Reserve Chairman
The Federal Reserve chairman’s remarks, made before the National Association for Business Economics, were hailed by Powell’s fellow officials, hawkish and dovish alike.
San Francisco Fed President Mary Daly, usually closer to the dove side of the spectrum, wants to see rates “marching up to neutral” or even further to stave off inflation.
St. Louis Fed President Jim Bullard, a hawk who has called for the equivalent of a dozen rate hikes in 2022, said when it comes to raising rates, “faster is better.” Bullard has set a target for the benchmark interest rate of 3% in 2022.
Stock Market Reaction
The stock market has been trading choppily, falling on Monday but recovering on Tuesday. Investors initially fled stocks in response to the Federal Reserve’s more aggressive stance as the fate of corporate profits became even more uncertain.
According to Charles Schwab’s Chief Investment Strategist Liz Ann Sonders, corporate America’s earnings revisions have already turned negative. However, by Tuesday, investors saw the glass half full, sending Big Tech stocks like Amazon, Facebook parent company Meta Platforms, and Google parent company Alphabet higher.
According to Reuters, the market expectations for a rate hike in the Fed’s next go-round have increased from a probability of slightly more than 50% at the start of the week to over 72% today. In response to Powell’s aggressive tone, the markets are bracing for approximately seven interest rate hikes in 2022.
Markets now price 7.34 #Fed hike moves this year – a fresh record – after Powell said Fed will do whatever it takes to beat back #inflation at National Association for Business Economics Conference. pic.twitter.com/v3pcp5IRKh
— Holger Zschaepitz (@Schuldensuehner) March 21, 2022
The next meeting of the Federal Open Market Committee (FOMC) is scheduled for early May.