The Federal Reserve must make moves soon to raise interest rates and return monetary policy to normal, according to Fed Chairman Jerome Powell. The Fed began its attempt to do so on March 16 when it announced its first interest rate hike since 2018, raising the benchmark rate to a range of 0.25%-0.5%.
More than three-quarters (77%) of economists surveyed in the NABE Economic Policy Survey released March 14 believe interest rates need to be higher and monetary policy is too loose.
A similar percentage of respondents expect inflation to stay above 3% through the end of 2023. Typically, the Fed targets around a 2% interest rate. "I believe that [our] policy actions and those to come will help bring inflation down near 2% over the next three years," said Powell.
The personal consumption expenditure price index less food and energy costs (the Fed's preferred measure of inflation) was 5.2% between January 2021 and January 2022, the highest it has been since April 1983. Consumer price inflation was 7.9% between February 2021 and February 2022, a level which has not been seen since early 1982.
"We need to get as quickly as we can to neutral,” said Atlanta Fed President Raphael Bostic.
Bostic has tentatively scheduled six rate increases in 2022, followed by two more in 2023, which would bring the federal funds rate to about 2.25%, he said.
"I find it appealing to front-load some of the needed increases earlier rather than later in the process because it puts policy in a better position to adjust if the economy evolves differently than expected," said Cleveland Fed President Loretta Mester.
America's growing inflation problem has many causes, such as high demand, supply chain backlogs, and other constraints caused by the pandemic. And more bad news for interest rates looms on the horizon in the form of Russia’s unprovoked war on Ukraine.
"Russia's invasion of Ukraine may have significant effects on the world economy and the U.S. economy," said Powell. What those effects might be are still unknown.
There’s also the risk that a tighter Fed policy might put the brakes on demand too much, contributing to a recession.
"No one expects that bringing about a soft landing will be straightforward in the current context -- very little is straightforward in the current context," said Powell.
In light of the ongoing pandemic and the Russian invasion of Ukraine, there seems to be no possibility of predictable economic conditions in the near future on which to base interest rate adjustments. Powell and the rest of the Fed will just have to hope that for a while there are no more major shocks to the global economy to complicate the issue further.