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Federal Reserve chair Jerome Powell. Picture: BRANDAN SMIALOWSKI/REUTERS
Federal Reserve chair Jerome Powell. Picture: BRANDAN SMIALOWSKI/REUTERS

Federal Reserve chair Jerome Powell, in his most hawkish remarks to date, said on Tuesday the Fed will raise interest rates until there is “clear and convincing” evidence that inflation is in retreat.

“What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,” he said during a Wall Street Journal live event. “If that involves moving past broadly understood levels of ‘neutral’, we won’t hesitate at all to do that.”

The Fed chair repeatedly stressed the need to curb the hottest inflation in decades during the roughly 35-minute interview, calling price stability “the bedrock of the economy” and acknowledging that some pain in achieving this — including a slight rise in the unemployment rate, was a cost worth paying to achieve it.

Powell and his colleagues raised interest rates by a half point at their meeting earlier in May and the chair said two similar moves were on the table in June and July. He repeated that guidance on Tuesday, noting that “if the economy performs as we expect, then that’s something that will be on the table”. The target for their benchmark rate now stands in a 0.75% to 1% range.

US stocks regained session highs as investors weighed the comments from Powell, while Treasury yields climbed, led by more policy-sensitive shorter-dated tenors.

“I think it was more hawkish,” said Derek Tang, an economist at LH Meyer, a policy analysis firm in Washington. “He is suggesting that this phase of 50s will last for longer. There was a suggestion that it could be more than two 50 basis point hikes.”

US consumer prices rose 8.3% in the 12 months through April, according to labor department figures published May 11. That was slightly lower than the 8.5% increase in the 12 months through March, which marked the highest inflation rate in 40 years.

Domestic demand remains strong even though financial conditions have tightened after a number of Fed officials have said they want to raise rates to neutral by year-end, which they see lying around 2.5%. 

“This is a strong economy and we think it’s well positioned to withstand less accommodative monetary policy, tighter monetary policy,” Powell said. “There could be some pain involved in restoring price stability — but we think we can sustain a strong labour market.”

Fed officials say they can reduce demand for jobs without raising unemployment by much from its current level of 3.6%. 

Powell, confirmed by the Senate last week to a second four-year term at the helm, said the labour market would still be strong even if the jobless rate was “a few ticks” higher than that.

Financial conditions

The S&P’s 500 stock index is down about 15% since its January peak, while yields on government 10-year notes stand around 2.98%, up from 1.5% at the start of the year.

The rise in longer-term yields is pushing up borrowing costs for housing — one of the most interest-rate sensitive sectors of the economy that the Fed would like to see cool to help curb price pressures. The rate on a 30-year fixed-rate mortgage stood above 5.4% last week, up slightly more than 2 percentage points from the start of the year, according to the national average tracked by Bankrate.com.

Powell said that the reaction in financial markets showed that investors were getting the Fed’s message.

“We like to work through expectations, and I’m not blessing any particular day’s readings, but it’s been good to see financial markets reacting in advance based on the way we’re speaking about the economy.”

Bloomberg News. More stories like this are available on bloomberg.com

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