Powell Says Fed Could Raise Rates More Quickly to Tame Inflation

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

“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, speaking from remarks prepared for delivery at a conference of business economists on Monday.

Policymakers raised interest rates by a quarter point last week and forecast six more similarly sized increases this year. Mr. Powell’s remarks made clear that the Fed was prepared to move more aggressively to reduce demand and cool off the economy by making big rate increases or taking rates to relatively high levels. A restrictive rate setting would squeeze the economy, slowing the labor market and potentially pushing unemployment higher.

“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.”

Mr. Powell’s 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.

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 underlined 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 at a moment when inflation was already high.

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

That means the oil and gas price spike could spell trouble for consumer inflation expectations, which the Fed watches closely. Expectations can become a self-fulfilling prophecy 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, Mr. Powell noted that the job market was already very strong, which could help the economy to make it through a period with more restrictive economic 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 come 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.

But employees have come back more slowly than forecasters expected. 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.”