[Big Step Preview] US Powell Mentions Paul Volcker Again... Will There Be a Third Consecutive Big Step?

[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Can Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), become the ‘inflation fighter’ Paul Volcker? With Powell pulling out the ‘big step’ card of raising the benchmark interest rate by 0.5 percentage points at once just over two weeks ahead of the regular Federal Open Market Committee (FOMC) meeting in May, the market is flooded with questions.

In particular, with Powell mentioning the ‘front-end loading’ approach, which means large rate hikes early on, the possibility of three consecutive big steps at the May to July meetings has emerged. The Fed’s strong tightening forecast has also raised concerns about the risk of a recession surrounding the U.S. economy.

◇ Powell Makes Big Step a Foregone Conclusion

At a panel discussion hosted by the International Monetary Fund (IMF) on the 20th (local time), Powell’s remarks were interpreted as indicating a steeper tightening path than right after last month’s FOMC, which raised the benchmark interest rate for the first time in 3 years and 3 months.

Powell did not just mention the big step card, which the Fed had not used for over 22 years. He went further by supporting market expectations that the 0.5 percentage point hike would not end at the May FOMC but could continue afterward. This effectively endorsed the hawkish remarks of Fed colleagues such as Lael Brainard, the nominee for Vice Chair, and John Williams, President of the New York Federal Reserve Bank.

Powell’s comment that "there is talk about front-end loading" is also interpreted as meaning that the Fed will raise rates sharply by 0.5 percentage points early on and then take a flexible approach depending on economic conditions and indicators.

According to the Chicago Mercantile Exchange (CME) Group’s FedWatch, immediately after Powell’s remarks were released, the probability that the Fed would follow the May big step with a 0.75 percentage point hike in June soared to 74.2%. This is more than 45 percentage points higher than a week earlier. Earlier, James Bullard, President of the St. Louis Federal Reserve Bank, had suggested the need for a 0.75 percentage point hike beyond the big step.

Additionally, Powell indicated that the Fed would no longer rely on supply chain improvements. Rather than waiting for conditions to ease inflation, the Fed plans to take demand suppression measures through its policy tools. This also signals a strong tightening stance.

Powell’s message regarding the labor market also changed. On this day, he described the labor market as "unsustainably hot." He expressed concern about the current situation where high inflation leads to wage increases, which in turn create upward inflationary pressure.

While stating that "the U.S. economy is very strong (enough to withstand tightening)," he acknowledged that achieving the Fed’s goal of a so-called soft landing would be difficult. Bank of America (BoA) assessed that with the Fed’s tightening forecast, the U.S. economy is now in a very precarious situation where it is uncertain whether it will fall into a recession.

◇ Will Powell Follow Volcker’s Path?

On the same day, Powell again praised former Chairman Paul Volcker during a separate conference in the morning.

Volcker, famous as an ‘inflation fighter,’ took office as Fed Chairman during the stagflation period in the late 1970s and implemented harsh tightening by raising interest rates from 12.2% to 22%?an increase of about 10 percentage points?in just 1 year and 3 months (September 1979 to December 1980). During this process, many companies went bankrupt due to the recession, and the unemployment rate soared to 10%. However, despite facing all kinds of threats, he did not stop the tightening path, and as a result, inflation was tamed.

Powell said, "He (Volcker) had to fight two things. One was the dragon called inflation, and the other was people’s belief that inflation would be persistent." This is interpreted as emphasizing his determination to push forward with monetary tightening like Volcker did at the time, even at the risk of a recession. Powell also praised Volcker as an excellent official during his appearance before the U.S. Congress ahead of the March rate hike.

This content was produced with the assistance of AI translation services.