
Federal Reserve Chairman Jerome Powell at a 2019 NABE conference. Photo: Daniel Brenner/Bloomberg via Getty Images
The Federal Reserve will set policy based on "actual progress" in resolving supply issues in the economy, rather than on models and forecasts, chair Jerome Powell said in a new speech, and it is open to faster rate increases as it tries to achieve a "soft landing" for the economy.
- The Fed will "will take the necessary steps to ensure a return to price stability," Powell said in prepared remarks for a speech to the National Association for Business Economics in Washington on Monday. The steps could include raising rates half a percent at a time, rather than the customary quarter-point.
Why it matters: Powell's comments imply that the Fed policy will be shaped less by economic forecasts that say inflation will come down — the rationale for holding off on monetary tightening for most of last year — and more by the realities of the economy.
Translation: The rate hikes will continue until supply constraints improve.
Powell also raised the possibility of raising rates beyond the levels Fed officials consider the "neutral" rate, around 2.4%, which would tend to restrict economic activity.
- He said that it "continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain."
State of play: The Fed seeks to accomplish a soft landing, reining in inflation without causing a recession. Powell acknowledged it is a delicate task, but said the historical record suggests it is achievable.
- In Fed officials' forecasts, he said, "growth slows as the very fast growth from the early stages of reopening fades, the effects of fiscal support wane, and monetary policy accommodation is removed."
Flashback: History is littered with examples of the Fed causing a recession in its attempts to rein in inflation. But Powell argued that there are better historical examples to follow.
- "I believe that the historical record provides some grounds for optimism: Soft, or at least soft-ish, landings have been relatively common in U.S. monetary history," he said. He cited episodes in 1965, 1984, and 1994, when the Fed raised rates in response to overheating without causing recession.
- "I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context," he said.
The bottom line: Powell adds that "very little is straightforward in the current context," which may be an understatement.