Federal Reserve Chairman Jerome Powell on Wednesday said that he expects multiple interest rate increases at an aggressive pace to tackle rising inflation emerging due to a strong labour market.

“We believe there’s more restriction coming... What’s really driving it ... is a very strong labour market,” Powell said during an exchange moderated by CNBC’s Sara Eisen in Sintra, Portugal. The question-and-answer session took place at a forum sponsored by the European Central Bank.

His comment echoes the sentiments expressed by fellow policymakers in their June meeting, where they indicated the likelihood of an additional half percentage point increase in interest rates by the end of 2023. Assuming a quarter-point increase per meeting, this would imply two more hikes. Powell previously suggested the possibility of hikes occurring at alternate meetings but now indicates that the schedule could be contingent on incoming data.

Since March 2022, the Federal Reserve has consistently raised rates at each meeting, including four consecutive three-quarter point increases before pausing in June. Powell mentioned that consecutive rate increases are not off the table, signaling a willingness to act if necessary.

As Powell discussed the Fed's current thinking, it becomes evident that the central bank believes the impact of the ten consecutive rate hikes has not fully permeated the economy. Consequently, policymakers cannot determine if the policy is "sufficiently restrictive" to bring inflation down to the Fed's target of 2 percent.

Although most economists anticipate that the rate hikes will lead to at least a mild recession, Powell notes that a downturn is a significant possibility but not the most likely outcome. "There’s a significant possibility that there will be a downturn," Powell said, adding that it’s not "the most likely case, but it’s certainly possible."

When asked about banking stresses, Powell said that the issues in March, which led to the closure of Silicon Valley Bank and two other institutions, influenced the Fed's considerations at the last meeting. While Powell generally views the US banking industry as solid, he emphasized the need to monitor credit availability, as recent surveys have shown tightening standards and decreasing loan demand.

"Bank credit availability and credit can move down a little bit with with a bit of a lag. So we’re watching carefully to see whether that does appear," he said.

At the same forum, other central bankers expressed their commitment to controlling inflation. European Central Bank President Christine Lagarde expects a hike in July, Bank of Japan Governor Kazuo Ueda indicated the possibility of tightening policy if inflation persists, and Bank of England Governor Andrew Bailey emphasized the importance of price stability.

Powell said that the inflation has proven more persistent than expected and that the Fed does not anticipate a turnaround in the near future, underscoring the ongoing need for vigilant monetary policy.

First Published:Jun 28, 2023 10:46 PM IST