Hawkish Fed chief opens door to faster US rate hikes to curb inflation

NEW YORK (BLOOMBERG, REUTERS) -  Mr Jerome Powell made clear that the United States Federal Reserve would act as needed to cool the hottest inflation in almost 40 years, endorsing interest-rate lift-off in March and opening the door to more frequent and potentially larger hikes than anticipated.

Stressing uncertainty on the economic outlook, including the risk that price pressures could fail to abate as forecast, the Fed chair told reporters on Wednesday (Jan 26) that policy must be “nimble” to confront risks to its mandate for price stability and maximum employment. Investors took the comments to mean that the Fed would be more aggressive in tightening than previously expected.

As Mr Powell spoke during a 55-minute virtual press conference, stocks erased gains, bond yields surged and the US dollar advanced. The S&P 500 index posted a back-to-back drop after rallying more than 2 per cent earlier in the day, while the two-year Treasury yield had the largest one-day increase since March 2020.

“There’s a risk that the high inflation we’re seeing will be prolonged, there’s a risk that it will move even higher. We have to be in a position with our monetary policy to address all of those plausible outcomes,” Mr Powell said, adding that officials were “of a mind” to raise rates in March. 

Mr Tom di Galoma, managing director at Seaport Global Holdings, said: “I do not think Fed chair Powell could have been more hawkish during his press conference than if he raised rates today."

Mr Powell “underscored that this period is nothing like the end of the last expansion as inflation is much higher", said analysts at Bank of America. "He is implying that they will need to move faster than back then. Bottom line, the risks are skewed to more than four hikes this year.”

Mr Powell spoke after the Federal Open Market Committee confirmed it would end its asset purchase programme in early March and begin shrinking its bond holdings after rate increases commence.

The hawkish pivot, against a backdrop of turmoil in stocks, comes amid consumer inflation readings that have repeatedly surprised and hit 7 per cent - the most since the 1980s - and a tight labour market that has pushed unemployment down faster than anticipated to almost its pre-pandemic level.

A rate hike would be the central bank’s first since 2018, with many analysts forecasting a quarter-point increase in March, to be followed by three more this year and additional moves beyond. Critics say the Fed has been too slow to act and is now behind the curve in tackling inflation, though key market gauges do not back that view. 

Fed funds futures traders are now pricing for 4.4 hikes by December, after previously fully pricing for four increases.

Futures also indicated around 30 basis points of tightening at the March meeting, showing a quarter-point increase is fully priced and implying a one-in-five chance of a 50 basis point hike.

The Fed also said it will conclude asset purchases on schedule, leaving them on track to end in “early March”.

Its balance sheet stands at nearly US$8.9 trillion (S$12.03 trillion), more than double its size before the Feds began massive asset purchases at the onset of the pandemic to calm market panic.

Mr Powell said the Fed will make decisions on the timing and pace of balance-sheet reduction at coming meetings.