Fed Chair Powell Calls a Faster Pace of Rate Increases ‘Appropriate’

Jerome H. Powell, the chair of the Federal Reserve, signaled on Thursday that the central bank was prepared to raise interest rates rapidly starting in May as it tries to cool down the economy and prevent fast inflation from becoming a lasting feature.

A larger-than-usual increase of half a percentage point “will be on the table for the May meeting,” Mr. Powell said on Thursday, after explaining that at a moment of high inflation “it is appropriate, in my view, to be moving a little more quickly” to raise borrowing costs in an effort to cool down demand and the broader economy.

Mr. Powell’s remarks, at an International Monetary Fund debate on the global economy, are likely to cement investor expectations for a large interest rate increase at the central bank’s meeting on May 3-4.

He spoke at a challenging juncture for the United States and the global economy. Growth has rebounded strongly from early in the pandemic, but that progress has come alongside stubbornly rapid inflation in America and other economies.

As prices rise at a pace not seen in decades, Russia’s war in Ukraine is exacerbating the situation by further disrupting supply chains and pushing up gas prices. At the same time, the conflict is expected to spur recessions in several Eastern European economies this year and is damaging the broader global economic outlook.

While U.S. policymakers have been monitoring the risks to growth, they are even more concerned with the war’s impact on inflation, from a domestic economic perspective. America’s Consumer Price Index for March showed that prices climbed 8.5 percent from a year earlier, the fastest pace since 1981, as oil prices surged amid the conflict, rents continued to climb and an array of goods and services became more expensive.

The breadth and persistence of high U.S. inflation have unsettled Mr. Powell and his colleagues. While they had initially hoped rapid price increases would fade as the economy returned to some version of normal, in March the Fed began lifting interest rates as it tries to keep high inflation from becoming more permanent.

Even since their meeting last month, officials and markets have come to anticipate a much faster pace of Fed action to slow the economy. Fed officials in March projected that they would make seven quarter-point rate increases in 2022; officials who have long pushed for low rates are now suggesting that nine would probably be appropriate.

To fit in that many increases, the Fed will have to raise interest rates by half a point at some of its meetings. As of Thursday morning, investors expected Fed officials to raise interest rates by half a percentage point at their upcoming meeting, and by at least that much at their two subsequent meetings, so that interest rates would rise from less than 0.5 percent now to above 2 percent in July.

Mr. Powell said on Thursday that “there’s something in the idea of front-end loading whatever accommodation one thinks is appropriate,” meaning that the central bank could raise interest rates more aggressively at the outset as it tries to catch up to the inflation situation.

Market pricing suggests that by the end of the year rates will be closing in on 3 percent, a height they have not touched since before the 2008 financial crisis.

As Fed officials work to cool down the economy, they expect to couple their interest rate increases with a plan to shrink their balance sheet, which was bloated by pandemic-era bond purchases meant to soothe the economy. Shrinking those holdings will push longer-term interest rates higher and further slow down borrowing. A plan for the balance sheet could come in May and start in June, officials have signaled.

The U.S. central bank’s withdrawal of policy support comes as rapid wage gains, quickly climbing housing costs and increasing price pressures in service industries combine with global supply disruptions to paint a dicey picture for the inflation outlook. Officials have become more convinced that price gains are not going to fade unless they actively slow down the economy to wrestle them under control.

“In the case of the United States, we have had an expectation that inflation would peak around this time and then would come down,” Mr. Powell said on Thursday, explaining the central bank’s thinking as it prepares to act to calm demand. “These expectations have been disappointed in the past.”

He said price gains might have peaked in March, but “we don’t know that, so we’re not going to count on it,” nor are policymakers going to count on help from improved supply.

Stubborn price increases have prompted a growing number of policymakers to call for policy rates that are not just poised to react if needed but that are high enough to actually weigh on economic activity.

“There’s more alignment on getting monetary policy to a neutral, slightly restrictive stance,” Charles Evans, president of the Federal Reserve Bank of Chicago, said at an event this week. “We’ll probably end up with something that is more restrictive.”

A key question is whether the Fed will be able to cool down the economy and control inflation without tipping the American economy into a recession, one that pushes unemployment higher and erases some of the gains won in the wake of pandemic lockdowns.

Fed officials, including Mr. Powell, have acknowledged that striking that balance — while possible — could be challenging.

“That’s our goal,” Mr. Powell said of a soft landing, while noting that nobody at the Fed would argue that it would be easy to achieve.

“I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy,” he said. “It’s going to be very challenging. We’re going to do our very best to accomplish that.”