Powell: More rate hikes likely needed to fight inflation

The Federal Open Market Committee may raise the federal funds rate at least two more times as it continues the fight against inflation, Federal Reserve Chairman Jerome Powell said today. Powell was joined by the heads of other central banks as part of a panel on monetary policy organized by the European Central Bank. Asked by the moderator about the FOMC’s decision to pause its recent spate of rate hikes at its last meeting, the chairman said the rate has not been in restrictive territory for very long and that a strong labor market is continuing to put upward pressure on inflation. Most FOMC members believe two or more hikes will be needed, he added.

“When you look at the data over the last quarter, what you see is stronger-than-expected growth, a tighter-than-expected labor market and higher-than-expected inflation,” Powell said. “So that tells us that although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” The chairman later said he does not expect core inflation to return to the Fed’s 2% target until at least 2025.

Powell was also asked about new capital requirements in the works for U.S. banks, particularly their potential effects on small and regional banks. He said that he saw the size and diversity of the U.S. banking system as a core strength.

“We think it’s a real benefit to have banks of different sizes and business models that serve local communities and offer different products, as well as having the large banks,” Powell said. “And the large banks in the United States are very strong, well-capitalized [with]a lot of liquidity, and they’ve been a source of strength through the last couple of events. So it’s important that whatever changes we make keep in mind the need to preserve the business models of these smaller banks and not just the largest banks.”