The central bank embarked on that journey last week when it announced the first interest rate increase since 2018, raising the benchmark rate to a range of 0.25%-0.5%.
In doing so, the Fed is acting in line with what economists believe is best: More than three-quarters — 77% — of participants in the NABE Economic Policy Survey released Monday believe monetary policy is too loose and that interest rates should be higher.
A similar percentage of survey respondents also expect inflation to stay above 3% through the end of 2023. For reference, the Fed targets a rate of around 2%.
“I believe that [our] policy actions and those to come will help bring inflation down near 2% over the next three years,” said Powell on Monday.
Atlanta Fed President Raphael Bostic echoed a sentiment similar to Powell’s in his address at the conference: “We need to get as quickly as we can to neutral.”
Bostic penciled in six rate increases this year, followed by another two in 2023, bringing the federal funds rate to about 2.25%, he said.
Both Bostic and Powell agree that the central bank will have to be flexible in its approach because much of the economy is in flux.
The bank could also opt for a larger rate hike in any given meeting, Powell said, for example by half a percentage-point.
The Ukraine factor and recession risk
America’s inflation problem, which stemmed from high demand, supply chain backlogs and other constraints caused by the pandemic, is not the only dark cloud on the economic horizon. The Ukraine conflict is expected to worsen price spikes further.
“There is a lot of uncertainty in the world and in the economy today,” said Bostic. That’s why “observe and adapt” has become the motto of his team, he added.
For example, the world could experience oil price shocks akin to those of the 1970s as a result of the Ukraine conflict, Powell said. “Fortunately, the United States is now much better situated to weather oil price shocks. We are now the world’s largest producer of oil, and our economy is significantly less oil intensive than in the 1970s,” he added.
Then there’s the risk that tighter Fed policy might slow demand too much. While the central bank expects a soft landing for the economy, a recession is still a risk.
“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.