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Fed officials discuss more aggressive rate hikes to control inflation

As inflation soars, policymakers signal more openness to a half percentage point hike at their next meeting

Federal Reserve Board Chair Jerome H. Powell is seen at a conference in Washington on March 21. (Samuel Corum/Getty Images)
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With inflation soaring at 40-year highs, Federal Reserve officials and economists are talking about more aggressive interest rate hikes to combat rising prices, even as so much uncertainty swirls around the U.S. and global economy.

On Wednesday, both Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly said they would be open to rate hikes as high as half a percentage point, which is sharper than the quarter-point hike Fed officials announced just last week.

Mester said her preference is to “front load” some higher rate increases given how urgent it is to bring inflation down.

“We need to be more aggressive earlier rather than later, because inflation is so much higher and because labor market conditions are very tight," Mester said.

In separate remarks, Daly also said she is in favor of putting “everything on the table” depending on how the economy evolves.

“If we need to do [0.50 percentage points], that is what we’ll do,” Daly said during the Bloomberg Equality Summit.

The comments come after Federal Reserve Chair Jerome H. Powell said earlier this week that the Fed could raise rates by 0.50 percentage points in the coming months, if it decided more forceful action was necessary to control inflation. The remarks marked a tougher stance from Powell.

Speaking before the National Association for Business Economics, Powell was asked what would keep the Fed from raising rates by 0.50 percentage points at the Fed’s next policy meeting in May. Powell’s response: “Nothing.”

Fed raises interest rates modestly, plans seven rate hikes in total this year

“The expectation going into this year was that we would basically see inflation peaking in the first quarter, then maybe leveling out,” Powell said. “That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly.”

At the same time, so much uncertainty hasn’t convinced everyone that more aggressive action is the answer. Earlier this week, Atlanta Fed President Raphael Bostic said “events are shifting rapidly” and that “the challenging economic conditions we were confronting have only become more challenging.”

“The elevated levels of uncertainty are front forward in my mind and have tempered my confidence that an extremely aggressive rate path is appropriate today,” Bostic said.

After two years of navigating a global pandemic, Fed officials are now setting policy against Russia’s invasion of Ukraine and a covid surge in China that has shuttered manufacturing hubs in Shenzhen and Changchun. The war in Ukraine is expected to further strain food and farming costs and global energy markets, with fears that U.S. households will continue to feel the pain at the gas pump. The latest factory closers in China also compound supply chain issues, and serve as a reminder of the pandemic’s continued drag on the global economy.

‘Survival mode’: Inflation falls hardest on low-income Americans

Powell and other Fed leaders caution that no upcoming decisions have been made. Fed leaders are also nearing a decision on when to start drawing down the central bank’s enormous $9 trillion balance sheet, and a decision could be announced at the May meeting.

The remarks highlight how quickly policymakers have had to shift, even overhaul, their thinking to keep up with the ever-changing nature of the covid economy. In a matter of months, Fed officials went from penciling in zero interest rate hikes in 2022, to forecasting three, then seven. As recently as February, when St. Louis Fed President Jim Bullard called for a more aggressive approach in the first half of the year, he was generally considered an outlier among his peers.

After Powell’s remarks this week, Goldman Sachs economists changed their forecasts to include 0.50 percentage point increases at the Fed’s May and June policy meetings. Markets are also pricing in higher rate increases.

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