Double rate hike ‘on the table’ for May, Fed’s Powell says
- Fed Chairman Jerome Powell gave his support for a double rate hike in May on Thursday.
- The Fed typically raises rates 0.25 percentage points at a time, but high inflation has prompted calls for a bigger hike.
- Such an increase would significantly increase rates for mortgages, car loans and interest on savings accounts.
Chairman Jerome Powell on Thursday offered the clearest indication yet that the central bank will soon issue a double rate hike as it intensifies its fight to calm inflation.
The Fed’s benchmark interest rate is its main tool to steer the economy, and after keeping rates near zero for much of the pandemic, the central bank is backtracking. The Fed raised the rate from its record low of 0.25 percentage points in March in hopes of calming the surge in prices. Yet, with inflation reaching 41-year highs and Russia’s invasion of Ukraine driving prices up sharply, calls for more aggressive action have intensified.
Many Fed policymakers suggested raising the rate by 0.50 points at the central bank’s May meeting, arguing that the inflation problem justifies accelerating the hike cycle and doing at least some double increases.
Powell supported those faster moves while speaking on a panel during IMF spring meeting Thursday. The chairman pointed to the Fed’s tightening cycle from 2004 to 2006, noting that the central bank raised rates during the period by 0.25 points at a time while inflation was just above 3%. Given that inflation is “much higher now” and rates are still lower than they were then, “it’s appropriate” for the Fed to act “a little faster.”
“We make these decisions in meetings and we will make them meeting by meeting, but I will say that 50 bps will be on the table for the May meeting,” he added.
A double rate hike would quickly ripple through the economy as a whole. A higher Fed rate leads to higher interest rates on everything from payday loans to interest on savings accounts. As the central bank continues its rate-hike cycle, Americans can expect more expensive mortgages, auto loans and credit card interest, as well as bigger payouts from their savings accounts. saving.
Powell’s remarks on Wednesday confirm what markets have already been pricing in for weeks. Investors largely expect the Fed to hike rates by 0.50 points at policy meetings in May, June and July, moves that would put the benchmark rate at around 2% by the end of the day. July. That’s up from the 1.5% the markets were forecasting just a month ago.
While expectations for further rate hikes are mixed, markets generally expect a rate of 2.5% at the end of 2022. Such a high benchmark rate has not been seen since July 2019.
Fed won’t ‘count’ on supply chain recovery
The Fed is also changing how it incorporates the supply chain crisis into its rate decisions. The central bank’s previous outlook predicted healing for supply chains throughout 2022 as economies reopen and businesses clear their heavy arrears. Yet the Russian-Ukrainian conflict has prolonged such a rebound and introduced new challenges for global logistics.
As such, the Fed “will no longer rely on help from supply-side healing,” Powell said. Improvements to the shipping crisis would be “extremely helpful” in bringing inflation back to healthy levels, but the central bank will tackle the inflation problem without expecting a near-term recovery, a- he added.
“If we get that, that would be great,” Powell said. “But we’re really going to raise rates and get to more neutral levels quickly, and then it will actually tighten policy if that’s appropriate once we get there.”