US Fed will go for more aggressive rate hikes to curb inflation, says Powell; What it means for Sensex

US Federal Reserve Chairman Jerome Powell said that the central bank will, if required, move "more aggressively" to raise federal funds rate by more than 25 basis points to curb inflation.

"The labour market is very strong, and inflation is much too high," Powell said in prepared remarks for the National Association for Business Economics'(NABE) annual economic policy conference in Washington D.C.

US Fed rate hike has impacted Sensex and many Asian markets as FIIs usually withdraw funds from these markets to explore domestic markets. Ever since its upward revision in January, FIIs have withdrawn huge funds resulting in fall in stock prices in India.

"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," he said.

Last week, the Fed raised its benchmark interest rate by a quarter percentage point to a range of 0.25 per cent to 0.5 per cent from near zero. This marked its first rate hike since 2018 and a major step in exiting from the ultra-loose monetary policy enacted at the start of the pandemic.

The central bank's quarterly economic projections released last week showed that most officials expect the federal funds rate to rise to 1.9 per cent by the end of this year and to around 2.8 per cent by the end of 2023. That implies a total of seven quarter-percentage-point rate hikes this year and another three or four next year.

At the NABE event, the central bank chief noted that the labour market is "extremely tight", significantly tighter than the very strong job market just before the Covid-19 pandemic, with nominal wages rising at the fastest pace in decades.

The rise in inflation, meanwhile, has been "much greater" and "more persistent" than forecasters generally expected, Powell said, noting that inflation moved up "sharply" in the fall amid continued Covid-related supply disruptions and strong demand.

US inflation at 5.5%

At the time of the Fed's June 2021 meeting, every Federal Open Market Committee (FOMC) participant and all but one of 35 submissions in the Survey of Professional Forecasters predicted that 2021 inflation would be below 4 per cent, but inflation came in at 5.5 per cent, according to Powell.

Just since the Fed's December meeting, the median FOMC projection for year-end 2022 jumped from 2.6 per cent to 4.3 per cent.

Noting that the inflation outlook had deteriorated significantly this year even before the Russia-Ukraine war, the Fed chief warned that the effects of the war and the western sanctions on Russia may have significant effects on the US economy.

In addition to the direct effects from higher global oil and commodity prices, the war and related events are "likely to restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the US economy", Powell said.

(With inputs from IANS)