Powell suggested in a panel discussion that the International Monetary Fund held during its spring meetings that there was something to the idea of “front-loading” aggressive rate increases as the Fed struggles with an inflation that has reached a 4-decade high.
Powell stated that Powell indicated that Powell believes the Fed will consider a half-point rate hike at its policy meeting on May 3-4. In the past, the Fed had raised its benchmark short term rate in smaller quarter-point increments. The Fed raising its rate often results in higher borrowing costs for individuals and businesses, as well as those who are looking to borrow money to purchase homes, cars, and other expensive goods.
Wall Street investors expect the Fed will raise its key rate by half-point at its next three meetings. This includes those in June and July. These expectations were reinforced by Powell’s remarks Thursday.
This would be the Fed’s fastest rate increase since 1994 when it raised its rate by 1.25 percent over three meetings.
Christine Lagarde (president of the European Central Bank), however, took part in Thursday’s discussion and sounded a more cautious tone. The level of inflation in 19 countries that use euro was 7.5% last month. This is the highest level recorded since 1997, when records began.
Russia’s invasion in Ukraine poses a greater threat to Europe’s economy than the United States. This has caused food and energy prices to soar and has had a negative impact on Europe’s economic growth.
Lagarde stated that the ECB would decide at its June meeting when to stop its bond purchase program. This is a plan to lower long-term rates. Similar efforts were made by the Fed in March. Although the ECB has established the July-September quarter target for stopping buying bonds, it has not been more specific.
Lagarde said that half of Europe’s inflation was caused by high energy prices. These supply shocks are often not addressed by interest rate policies.
Lagarde stated that “our economies are moving at different speeds”, referring to Europe and America, which have experienced faster growth. “Our inflation is fed from different components.”
