Fed’s Powell to Take WSJ Questions on Inflation and Economic Outlook

Mr. Powell and his colleagues have raised interest rates twice this year—most recently earlier this month by a half percentage point—to a range between 0.75% and 1%. Fed officials have also signaled that the current economic outlook would justify raising rates by half-point increments at least at the Fed’s next two policy meetings, in June and July. Until this month, the Fed hadn’t raised rates in such intervals since 2000.

The Fed chairman has outlined his hope that the central bank can curtail high inflation without spurring a large rise in unemployment. In recent public statements, though, he has said pulling that off will be difficult.

“This will be very challenging. It’s not going to be easy. And it may well depend, of course, on events that are not in or under our control,” said Mr. Powell at a news conference two weeks ago. “But our job is to use our tools to try to achieve that outcome. And that’s what we’re going to do.”

Fed officials described higher inflation a year ago as temporary. They backed away from that characterization last fall, as the labor market healed rapidly and price pressures broadened to a range of goods and, more important, labor-intensive services.

Still, the Fed as recently as January had expected inflation to diminish this spring as supply-chain bottlenecks improved. So far that hasn’t happened. Meanwhile, the labor market has become exceptionally tight, with nearly two job openings for every unemployed worker looking for a job in March.

The war in Ukraine and renewed lockdowns in China to deal with a Covid-19 surge have ended any expectation of near-term relief, prompting many Fed officials to call for a faster pace of rate rises this spring and summer.

The Fed is still counting on inflation falling later this year as supply-chain disruptions ease and more workers return to labor markets. But unlike last year, Fed leaders have said the central bank could no longer set near-term policy by forecasting that such relief would materialize.

Investors have been focused on the near-term pace of rate increases, with financial markets reacting to Fed policy, U.S. inflation, the Russia-Ukraine war and China’s economic slowdown.

The Fed’s stopping point for rate increases is shrouded in uncertainty. If inflation doesn’t soon show signs of diminishing, more officials could conclude rates will need to rise closer to 4% over the next 12 to 18 months rather than to a level around 3% that most of them projected at their policy meeting two months ago.

The most recent inflation data has been mixed. On a monthly basis, the consumer-price index’s gauge of core prices, which excludes food and energy, rose a seasonally adjusted 0.6% in April, according to a Labor Department report last week, and rose 6.2% over the previous 12 months.

The Fed uses a different gauge, the personal-consumption expenditures price index. April inflation data from that Commerce Department report will be released on May 27. Based on other recently released figures, Wall Street forecasters estimate a more muted rise in inflation using that measure. Economists at Morgan Stanley think core PCE inflation rose by less than 0.3% in April, bringing the 12-month rate of change to 4.8%, from 5.2% in March.

Write to Nick Timiraos at [email protected] and Michael S. Derby at [email protected]

Mr. Powell and his colleagues have raised interest rates twice this year—most recently earlier this month by a half percentage point—to a range between 0.75% and 1%. Fed officials have also signaled that the current economic outlook would justify raising rates by half-point increments at least at the Fed’s next two policy meetings, in June and July. Until this month, the Fed hadn’t raised rates in such intervals since 2000.

The Fed chairman has outlined his hope that the central bank can curtail high inflation without spurring a large rise in unemployment. In recent public statements, though, he has said pulling that off will be difficult.

“This will be very challenging. It’s not going to be easy. And it may well depend, of course, on events that are not in or under our control,” said Mr. Powell at a news conference two weeks ago. “But our job is to use our tools to try to achieve that outcome. And that’s what we’re going to do.”

Fed officials described higher inflation a year ago as temporary. They backed away from that characterization last fall, as the labor market healed rapidly and price pressures broadened to a range of goods and, more important, labor-intensive services.

Still, the Fed as recently as January had expected inflation to diminish this spring as supply-chain bottlenecks improved. So far that hasn’t happened. Meanwhile, the labor market has become exceptionally tight, with nearly two job openings for every unemployed worker looking for a job in March.

The war in Ukraine and renewed lockdowns in China to deal with a Covid-19 surge have ended any expectation of near-term relief, prompting many Fed officials to call for a faster pace of rate rises this spring and summer.

The Fed is still counting on inflation falling later this year as supply-chain disruptions ease and more workers return to labor markets. But unlike last year, Fed leaders have said the central bank could no longer set near-term policy by forecasting that such relief would materialize.

Investors have been focused on the near-term pace of rate increases, with financial markets reacting to Fed policy, U.S. inflation, the Russia-Ukraine war and China’s economic slowdown.

The Fed’s stopping point for rate increases is shrouded in uncertainty. If inflation doesn’t soon show signs of diminishing, more officials could conclude rates will need to rise closer to 4% over the next 12 to 18 months rather than to a level around 3% that most of them projected at their policy meeting two months ago.

The most recent inflation data has been mixed. On a monthly basis, the consumer-price index’s gauge of core prices, which excludes food and energy, rose a seasonally adjusted 0.6% in April, according to a Labor Department report last week, and rose 6.2% over the previous 12 months.

The Fed uses a different gauge, the personal-consumption expenditures price index. April inflation data from that Commerce Department report will be released on May 27. Based on other recently released figures, Wall Street forecasters estimate a more muted rise in inflation using that measure. Economists at Morgan Stanley think core PCE inflation rose by less than 0.3% in April, bringing the 12-month rate of change to 4.8%, from 5.2% in March.

Write to Nick Timiraos at [email protected] and Michael S. Derby at [email protected]