Dove or Hawk?—Fed Chair Jerome Powell Bracing America for ‘Ongoing’ Rate Increases

Federal Reserve Board Chairman Jerome Powell at the Federal Reserve Building in Washington, on Dec. 14, 2022. (Evelyn Hockstein/Reuters)

The Federal Reserve raised interest rates on Feb. 1 by 25 basis points, lifting the target rate to a more than 15-year high of 4.50 to 4.75 percent.

While investors had anticipated a quarter-point jump to the benchmark federal funds rate, financial markets added to their losses when the Federal Open Market Committee (FOMC) statement revealed “ongoing” rate hikes and “future increases.” However, that negative sentiment quickly turned positive during Federal Reserve Chair Jerome Powell’s post-FOMC news conference, igniting a late-day rally on Wall Street and erasing its losses.

Powell had reiterated in his opening remarks that the rate-setting committee anticipates “ongoing increases” to “attain a stance of monetary policy that is sufficiently restrictive.” This, Powell noted, would help the central bank resuscitate price stability and return to its inflation target of 2 percent over time.

At the same time, Powell purported that it’s “certainly possible” for the federal funds rate to stay below 5 percent, adding that it’s possible to achieve its inflation goal “without a really significant downturn or a really significant increase in unemployment.”

“We can now say, I think, for the first time, that the disinflationary process has started,” he said. “We can see that, and we see it really in goods prices so far.”

However, according to the central bank’s chief, it would be “premature to declare victory.” He alluded to the core personal consumption expenditure (PCE) services ex-housing metric that has yet to experience disinflation, further noting that he anticipates higher inflation in housing services.

“We’ve raised rates 4.5 percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell stated. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”

The next Federal Reserve meeting is scheduled for late next month. Most investors expect another quarter-point increase.

Doves or Hawks?

Despite expectations of additional rate hikes and tighter monetary policy this year, some market experts still think the Fed will hit the pause button in spring.

“Like a small dog sounding like a wolf, the Fed raised rates a meager quarter of a percent sounding hawkish about more rate increases to come,” Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income Advisors, said in a note. “Given sharply slowing core CPI, we only expect one more quarter increase in March before putting rate increases on hold in May. By May, most inflation indicators will be running at three-month annualized rates below 3 percent.”

The increase of 25 basis points wasn’t entirely surprising, as markets had been pricing that in for weeks, Jan Szilagyi, CEO of investment firm Toggle AI, says.

Fed officials have insisted that there would be no cuts this year. But, according to Szilagyi, the key question now is whether that was the last increase.

“The tease in that same Fed media communication was the suggestion of a ‘pause’ that could happen as soon as this spring,” he said. “That could herald the end of the tightening cycle, and a betting race for the start of the easing cycle.”

Whatever the case may be, some lawmakers in Washington are confident that Powell will get control of inflation.

“Jay Powell is as serious as an aneurysm about stopping inflation,“ Sen. John Kennedy (R-La.) told NTD. ”He is going to continue to raise rates until he thinks he has inflation under control.”

Other lawmakers say that Congress must do its part, too. This includes reining in spending to tame inflation.

“I do know that what we need to do is rein in federal spending. We’ve never had a revenue problem in D.C. We have a spending problem,” Rep. Pat Fallon (R-Texas) told NTD.

He said that “you always hope for the best and prepare for the worst” when it comes to the idea of the Fed engineering a soft landing.

The U.S. government is projected to spend more than $6 trillion in fiscal year 2023, representing the fourth consecutive year of $6 trillion-plus spending efforts. According to the Congressional Budget Office, the annual budget deficit would average $1.6 trillion from 2023 to 2032, as outlays are predicted to average 23 percent of GDP over this span.

Looking ahead, Powell acknowledged that two more employment and consumer price index reports would be released before the March policy meeting.

The January nonfarm payroll report is expected to show 185,000 new jobs. In addition, the January annual inflation rate—to be published on Feb. 14—is projected to dip to 6.4 percent, according to the Cleveland Fed Bank nowcast.

Powell said that the first-quarter employment cost index (ECI) will be another critical report that comes out after the March FOMC meeting. The fourth-quarter ECI rose by 1 percent in the fourth quarter (pdf), below the market estimate of 1.1 percent. It was also the third consecutive quarterly slowdown. However, on a year-over-year basis, compensation costs jumped to 5.1 percent in the October-to-December span, up from 5 percent in the previous three-month period.

NTD reporter Melina Wisecup contributed to this report.