Powell Says Fed Could Raise Rates More Quickly to Tame Inflation

Jerome H. Powell, the Federal Reserve chair, said on Monday that the central bank was prepared to more quickly withdraw support from the economy if doing so proved necessary to bring rapid inflation under control.

Mr. Powell signaled that the Fed could make big interest rate increases and push rates to relatively high levels in its quest to cool off demand and temper inflation, which is running at its fastest pace in 40 years. His comments were the clearest statement yet that the central bank was ready to forcefully attack rapid price increases to make sure that they do not become a permanent feature of the American economy.

“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability,” Mr. Powell said during remarks to a conference of business economists.

Policymakers raised interest rates by a quarter point last week and forecast six more similarly sized increases this year. On Monday, Mr. Powell foreshadowed a potentially more aggressive path. A restrictive rate setting would squeeze the economy, slowing consumer spending and the labor market — a move akin to the Fed’s hitting the brakes rather than just taking its foot off the accelerator.

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Mr. Powell said. “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Asked what would keep the Fed from raising interest rates by half a percentage point at its next meeting in May, Mr. Powell replied, “Nothing.” He said the Fed had not yet made a decision on its next rate increase but noted that officials would make a supersized move if they thought one was appropriate.

“The expectation going into this year was that we would basically see inflation peaking in the first quarter, then maybe leveling out,” Mr. Powell said. “That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly.”

Stocks fell in response to Mr. Powell’s comments and were down 0.6 percent by the time he finished speaking in the early afternoon; the S&P 500 index closed the day down 0.4 percent. Higher interest rates can push down stock prices as they pull money away from riskier assets — like shares in companies — and toward safer havens, like bonds, and as they make money more expensive to borrow for businesses. The yield on the benchmark 10-year Treasury note rose as high as 2.3 percent as Mr. Powell was speaking, and the yield on two-year Treasurys rose above 2 percent for the first time since 2019.

Rising rates can especially hurt share prices if they tank economic growth or cause the economy to contract.

While the Fed has often caused recessions by raising interest rates in a bid to slow down demand and cool off price increases, Mr. Powell voiced optimism that the central bank could avoid such an outcome this time, in part because the economy is starting from a strong place. Even so, he acknowledged that guiding inflation down without severely hurting the economy would be a challenge.

“No one expects that bringing about a soft landing will be straightforward in the current context,” Mr. Powell said.

But getting price gains under control is the Fed’s priority, and while the central bank had been hoping for inflation to fade as pandemic disruptions abate, Mr. Powell was adamant that it could no longer watch and wait for that to happen.

In addition to raising rates, the Fed plans to reduce its large bond holdings by allowing securities to expire, which would push up longer-term borrowing costs, including mortgage rates, helping to take steam out of the economy. Mr. Powell emphasized that the balance sheet shrinking could begin imminently.

Action on the balance sheet “could come as soon as our next meeting in May, though that is not a decision that we have made,” Mr. Powell said.

The Fed is preparing to pull back support even as Russia’s invasion of Ukraine stokes economic uncertainty. The conflict has pushed energy prices higher, something that the Fed would typically discount, since it is likely to fade eventually. But Mr. Powell said it could not ignore the increase when inflation was already high.

“The inflation outlook had deteriorated significantly this year even before Russia’s invasion of Ukraine,” Mr. Powell noted.

The oil and gas price spike and other commodity disruptions tied to the war in Ukraine could push already accelerating prices even higher, spelling trouble for consumer inflation expectations. Expectations can become self-fulfilling if shoppers and businesses come to expect inflation year after year and act accordingly.

“The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher,” Mr. Powell said.

Still, he noted that the job market was already very strong, which could help the economy withstand a period with more restrictive policy.

“By many measures, the labor market is extremely tight, significantly tighter than the very strong job market just before the pandemic,” Mr. Powell said. “Record numbers of people are quitting jobs each month, typically to take another job with higher pay.”

Fed officials are hoping that workers — who are in short supply — will go back into the job market in the coming months and years, helping to take pressure off employers. If that happens, it could help inflation to slow down as wage growth moderates.

“In a sense, it’s a great labor market,” Mr. Powell said — but not a sustainable one. He noted that “this is a labor market that’s out of balance, that really has an excess of demand over supply.”

Employees have gone back more slowly than forecasters expected, either because they retired early or because pandemic-tied issues like caregiving shortages are keeping them at home. Likewise, supply chain problems, like factory shutdowns and shipping snarls, have been slower to heal, in part because of repeated coronavirus outbreaks.

“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,” Mr. Powell said. “In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”

Talmon Joseph Smith contributed reporting.