There is an obvious need to quickly move to a more neutral level, higher if necessary

Fed Chairman Jerome Powell he said in a speech on Monday that there is an obvious need to quickly move to a more neutral level and even more restrictive levels if necessary to restore price stability, Reuters reported. The risk is rising that there could be a prolonged period of high inflation that could push long-term expectations uncomfortably higher, Powell added, noting that the Fed must move quickly to combat that.

Action on the balance sheet could come as soon as the next Fed meeting, but a final decision has yet to be made, he continued, adding that if we need to adjust beyond the common neutral rate measure to a more restrictive stance. , then we should If we need to raise the fed funds rate by more than 25 bps at a meeting of meetings, we will, he warned, hinting at a possible 50 bps move.

As the outlook evolves, Powell continued, the Fed will tighten policy to restore price stability while preserving a strong labor market. Powell said we are headed once again for more Covid-related supply disruptions from China, meaning the timing and extent of supply-side easing remains highly uncertain. The Russian invasion of Ukraine may have significant effects on the US and world economies, he added, noting that the magnitude and persistence of these effects are highly uncertain.

In addition, Powell continued, the war in Ukraine is likely to curtail economic activity abroad and further disrupt supply chains, creating spillover effects on the US economy. The Fed should set policy based on actual inflation progress and not assume significant supply-side easing in the short term, Powell said, predicting that the Fed’s actions on interest rates and the balance sheet will help reduce inflation to around 2.0% over the next three years.

History may provide reason for optimism that the Fed can achieve a “soft landing,” Powell said, though he cautioned that the Fed’s projections can quickly become outdated at times like these with rapidly unfolding events.

market reaction

Powell’s comments are largely a reiteration of his comments at the post-meeting news conference last week. Still, it’s a reminder of his new aggressive view that 1) rates could rise in 50bp intervals and 2) rates could rise above what is termed “neutral” (seen by most between 2.0 and 2.5). %) if necessary to control inflation. Thus, equities fell slightly, the US dollar rose slightly, and US 2-year bond yields rose by about 4 bps, while 10-year yields rose by about 3 bps.