Why the Federal Reserve needs to move “expeditiously” towards tighter monetary policy

Jerome Powell, chair of the Federal Reserve of the United States, has recently stated that he believes the Federal Reserve needs to move “expeditiously” towards tighter monetary policy in order to reduce inflation.

He has expressed confidence in the fact that the US central bank will be able to do so without causing any recession.

These comments of Powell’s were said just days after the Fed delivered its first interest rate increase since 2018, and many more rate rises are expected throughout this year and into 2023.

The Fed chair laid out the case for a series of increases in interest rates this year whilst at a conference hosted by the National Association for Business Economics on Monday 21st of March 2022. He also discussed substantive steps to shrink the central bank’s $9tn balance sheet, as it confronts both a labour market that appears “extremely tight” and inflation that is “much too high”.

Last week, a majority of central bank officials signalled that the benchmark policy rate would jump from the current 0.25-0.50% to a figure of 1.9% by the end of the year. This increase would require six quarter-point increases at each of the remaining gatherings of the Federal Open Market Committee this year.

The “dot plots” of individual policymakers’ interest rate projections showed that 7 out of 16 officials expect rates to rise above 2% in 2022, indicating that at least one of the adjustments this year will be a half-point.

Most officials predicted that rates would rise to 2.8% in 2023.

Additionally, on Monday, the president of the Atlanta Fed, Raphael Bostic, said that he supported just 5 more interest rate increases this year, which would bring the fed funds rate to approximately 1.63%.

However, Bostic’s views are in contrast to those of James Bullard, president of the St Louis Fed, who said that he supported the fed funds rate rising above 3% this year.

Bullard dissented from the committee’s decision to raise the benchmark interest rate just a quarter of a percentage point last week, instead opting to favour a half-point move.

Bullard was joined on Friday by Fed governor Christopher Waller who advocated for “front-loading” rate increases this year, with half-point rate rises “at one or multiple meanings in the near future”. He supports a policy rate above a range of 2% and 2.25% by the end of the year, and for the Fed to soon begin shrinking it's $9tn balance sheet.

Powell states that “there is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level and then to move to more restrictive levels if that is what is required to restore price stability.”

The “neutral” interest rate is one that will neither aid nor stunt growth and according to most policymakers, that figure is around 2.4%.

Furthermore, on Monday, Powell pushed back concerns that future monetary policy tightening would cause a recession, citing events in 1965, 1984 and 1994 when the Fed slowed an overheated company without prompting a sharp contraction.

“I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context,” Powell warned. “And monetary policy is often said to be a blunt instrument, not capable of surgical precision.”

Powell went on to say that it is necessary for a "substantial firming in the stance of policy", despite there being a sharp escalation in geopolitical tensions related to Russia's invasion of Ukraine. The war is expected to add "near-term upward pressure" to the prices of energy, food and commodities at a time of "already too high inflation”.

"The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously as I have described," he said.

Officials last week raised the median estimate for core inflation this year to 4.1% from 2.7% in December. Their forecasts for the fund's rate during this year ranged between 1.4% and 3.1%.


Written by Jade Andrew.

Research by Louis-Daniel Oloyede.

Statistics cited from:


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