Powell: "Need to Raise Interest Rates Twice More This Year to Control Inflation"

"There is a long way to go." Jerome Powell, Chair of the U.S. Federal Reserve (Fed), on the 29th (local time) reiterated for the second consecutive day his existing stance that two additional interest rate hikes are necessary within this year to ease inflation.

Chair Powell made these remarks while attending the Banco de Espa?a conference held in Madrid, Spain, stating, "It will take considerable time to ease inflation."

He questioned, "Before the pandemic, we could not have imagined interest rates in the 5% range. Now the question is whether that is sufficiently restrictive policy," reaffirming his commitment to further tightening. He also repeated his previous statement that "the majority of Federal Open Market Committee (FOMC) members expect two rate hikes this year."

Earlier, on the 14th, the Fed held rates steady at the FOMC meeting but raised the year-end rate forecast on the dot plot from 5.1% (median) to 5.6%. This suggests the possibility of two baby steps (0.25 percentage point rate hikes) in the remaining four meetings this year.

[Image source=AP Yonhap News]

During the subsequent Q&A session, Chair Powell said the timing and extent of additional rate hikes depend on the economic outlook. However, he also confirmed that "he did not rule out raising rates consecutively," leaving open the possibility of consecutive hikes in July and September. This is largely consistent with hawkish remarks made the previous day. At the European Central Bank (ECB) forum the day before, he had said, "We will not rule out moving at consecutive meetings (rate hikes) on the table."

In the market, the prevailing view is that the Fed, having paused rate hikes this month to catch its breath, will resume raising rates at the next FOMC meeting in July. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in nearly an 87% chance of a baby step in July. However, unlike the Fed's dot plot signaling two hikes this year, the rate futures market still favors a scenario of one hike followed by a pause.

Economic indicators released on the day also showed strength, suggesting that despite over a year of tightening, the U.S. economy remains robust. The finalized U.S. first-quarter gross domestic product (GDP) growth rate was recorded at an annualized 2.0%, revised up 0.7 percentage points from the preliminary estimate of 1.3% announced last month. The initial flash estimate was 1.1%. The U.S. Department of Commerce explained that upward revisions in exports, consumer spending, and government expenditures contributed to the higher finalized growth rate. The U.S. growth rate is released in three stages: flash, preliminary, and finalized estimates.

On the same day, the Department of Labor reported that initial jobless claims for the previous week fell by 26,000 to 239,000, below Wall Street's forecast of 265,000. Continuing claims, representing those receiving unemployment benefits for at least two weeks, also decreased by 19,000 to 1.74 million. Considering Chair Powell's repeated emphasis that achieving the 2% inflation target requires below-trend growth and a cooling labor market, these indicators are analyzed as factors supporting further Fed tightening.

On the following day, the 30th, the personal consumption expenditures (PCE) price index, a key inflation gauge monitored by the Fed, will be released. The market expects the May core PCE to rise 4.6% year-over-year and 0.3% month-over-month, a slight deceleration from the previous month. Should this indicator exceed expectations with a strong reading, tightening pressure on the Fed could intensify.

At the conference, Chair Powell also addressed the need for regulatory updates related to the regional banking crisis triggered by the Silicon Valley Bank (SVB) collapse. He reflected, "In the past, bank runs meant people lining up in front of ATMs, but what we saw at SVB was different." He added that if a liquidity shortage had occurred at large banks at that time, the turmoil would have been even greater. The Fed announced the previous day that major U.S. banks passed stress tests assuming severe recession scenarios.

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