Fed Chair Powell: There is an obvious need to move expeditiously to a more neutral level, higher if needed

Fed Chair Jerome Powell said in a speech on Monday that there is an obvious need to move expeditiously to a more neutral level and even more restrictive levels if needed to restore price stability, reported Reuters. The risk is rising that there could be an extended period of high inflation that could push longer-term expectations uncomfortably higher, Powell added, noting that the Fed needs to move expeditiously to combat that. 

Action on the balance sheet could come as soon as the next Fed meeting, but no final decision has yet been made, he continued, adding that if we need to tighten beyond the common measure of the neutral rate into a more restrictive stance, then we will do so. If we need to raise the Fed funds rate by more than 25bps at a meeting of meetings, we will do so, he warned, hinting towards a potential 50bps move. 

As the outlook evolves, Powell continued, the Fed will adjust policy to restore price stability while preserving a strong labour market. Powell said that we are headed once again into more Covid-related supply disruptions from China, meaning that the timing and scope of supply-side relief remain highly uncertain. Russia's 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.

Moreover, Powell continued, the war in Ukraine is likely to restrain economic activity abroad and further disrupt supply chains, creating spillovers to the US economy. The Fed must set policy based on actual progress on inflation and not assume significant near-term supply-side relief, Powell said, predicting that the Fed's actions on interest rates and the balance sheet will help bring inflation down to near 2.0% over the next three years. 

History can provide grounds for optimism that the Fed can achieve a "soft landing", said Powell, though he warned that the Fed's projections can quickly become outdated at times like these with events developing rapidly. 

Market Reaction

Powell's comments are largely a reiteration of his remarks in the post-meeting press conference last week. Still, it's a reminder of his new hawkish view that 1) rates could be lifted in 50bps intervals and 2) rates could be lifted above so-called "neutral" (seen by most between 2.0-2.5%) if needed to tame inflation. Thus, equities saw a bit of a drop, the US dollar saw a slight jump and US 2-year yields saw about a 4bps jump while 10-year yields were up about 3bps.