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Federal Reserve Chair Jerome Powell spooked investors Monday with an admission that the central bank has an inflation problem that could require an even more aggressive approach to tamp down inflation than previously expected.
US stocks fell after Powell said the central bank would move “expeditiously” to address inflation, potentially by raising interest rates more sharply in the future than the quarter-percentage-point hike announced last week. By raising rates at a faster clip this year, the Fed would be dialing down the flow of cheap money that allows bets on riskier assets and fuels higher stock prices.
“Powell is waking everyone up after investors got comfortable with a narrative that the Fed’s got your back,” said Sam Stovall, chief investment strategist at CFRA, Bloomberg reported.
The Dow Jones Industrial Average sank more than 200 points on Monday, or by about 0.6%. The S&P 500, the broadest measure of US stocks, dropped slightly and the tech-heavy Nasdaq fell about 0.4%.
“The labor market is very strong, and inflation is much too high,” Powell said at the National Association for Business Economics conference. “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.”
Powell added that if Fed officials determined it was “appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
Inflation surged to a four-decade high of 7.9% in February, far higher than the 2% level the Fed deems acceptable under normal conditions.
The cost of fuel and goods continues to rise — with experts warning the trouble could get worse if the Russian invasion of Ukraine escalates.
Powell said the Fed would maintain its commitment to keep inflation near 2% — a level he suggested could be reached within the next three years as the central bank tightens monetary policy.
The Fed’s quarter-percentage-point hike following its meeting earlier this month marked the first increase of its kind in three years. The small-bore increase of only 0.25% soothed investors who’d worried a more-aggressive Fed would stop the flow of cheap money flooding markets. That helped send stocks sharply higher in the wake of last week’s decision.
Now, talk of raising rates at a faster-than-expected clip could rain on the market parade.
“Last week, investors gravitated to a theme of a soft landing, with the Fed as the wizard behind the curtain,” CFRA’s Stovall said. “But this week, Powell is back saying, ‘Hold on, the Fed’s main focus is jobs and inflation, and risky assets are secondary.’ Perhaps Powell is trying to steer investor sentiment away from a ‘buy anything’ mentality, which started to catch fire last week.”
Most Fed policymakers indicated their expectation that interest rates would reach 1.9% by the end of 2022 — a level achievable through six more quarter-percentage-point hikes this year.
But Powell indicated that plan could change. The central bank will face pressure to act if inflation continues its wild surge in response to the Russia-Ukraine war — especially if the violence pushes the price of oil and gas even higher.
“In normal times, when employment and inflation are close to our objectives, monetary policy would look through a brief burst of inflation associated with commodity price shocks,” Powell said. “However, 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.”
Following the Fed chair’s remarks, US investors projected a 60.7% chance that the Fed will enact a half-percentage-point increase at its May meeting. That was up from 52% before Powell spoke.
Meanwhile, red-hot inflation is costing the average US household an additional $296.45 in expenses as surging food and fuel costs stretch budgets, according to calculations provided to The Post by Ryan Sweet, a senior economist at Moody’s Analytics. He crunched the numbers after the latest Labor Department data showed consumer prices jumped 7.9% in February.
He arrived at the figure by comparing average US household spending last month to what would have been spent in 2018 and 2019, when inflation paced at 2.1%.
With Post wires
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