Jerome Powell doesn’t like to bless bets in financial markets, but he could shift the needle this week on how high investors expect the Federal Reserve to raise interest rates to cool overheated prices.
The Fed chair and his colleagues want to lift rates expeditiously to a neutral level this year that neither stimulates nor restrains growth -- around 2.5% -- and then slow the pace of tightening.
But in crises, central banks that pause typically lose as the forces they’re battling -- be it spreading financial panic or broadening inflation -- gain more momentum.
“You don’t pause along the way” in an inflation fight, said former Fed Governor Laurence Meyer who now runs policy analysis firm LH Meyer. “You do look around, but there is an urgency of moving beyond” a neutral rate of interest.
U.S. central bankers don’t want to trigger a recession and Powell has voiced confidence in the Fed’s ability to pull off a soft landing that brings inflation toward its 2% target without stalling the economy.
But he has also prioritized price stability. “If we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that,” Powell said March 21.
He publicly backed front-loading policy tightening in April 21 remarks that helped cement expectations for a half-point hike when officials conclude their two-day meeting Wednesday, followed by at least that large a move in June.
Minutes of their March gathering also signaled the committee will likely agree to start shrinking their $9 trillion balance-sheet in May, quickly moving to a maximum runoff pace of $95 billion a month.
Having already provided a lot of clues for what to expect, most of the new information will come via Powell’s post-meeting press conference at 2:30 p.m. in Washington -- his first to be held in-person since the pandemic began.
Powell will have just spent two days gauging the mood of his colleagues. If he comes out and signals policy may require a more restrictive stance -- meaning above its neutral setting -- it would be a significant shift. The market consensus currently shows rates peaking above 3.4%, but that is above the median Fed forecast that was updated in March.
“The Fed has very little room to under-deliver” on policy restraint, said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle. “They have to say they’re willing to risk tipping the economy into recession to signal credibility on inflation.”