Translating Powell's words: The Fed chair's real message on rate-hike plans

The Federal Reserve on Wednesday signaled that it will likely raise interest rates in March, in what is expected to be the first in a series of hikes this year amid surging inflation.

Investors are expecting four increases in 2022, including one in March, and Fed Chair Jerome Powell did nothing at his post-Fed meeting press conference to dissuade them from those projections, which have been causing turmoil in markets. Stocks, which had been gaining before he spoke, fell sharply after his comments.

“We feel like the communications we have with market participants and with the general public are working,” Powell said after the Fed’s two-day policy session.

Powell faced reporters at a pivotal moment for the central bank, President Joe Biden and the broader economy. His goal: to set policy expectations without triggering a panic, while also acknowledging the uncertainty that lies ahead.

The Fed has had to reverse course after inflation did not fade as quickly as the central bank expected — officials have retired the word “transitory” in describing it — with persistent supply-chain disruptions and unexpected worker shortages fueling a rise in consumer prices.

The success of the Fed’s efforts to fight inflation by withdrawing some of its massive economic aid, in place since the start of the pandemic, could affect Democrats’ chances of maintaining control of Congress in the 2022 elections. If the central bank doesn’t do enough to tighten monetary policy, it could fail to halt the spike in prices. If it goes too far, it could derail Biden’s economic recovery.

Here were some key quotes from Powell at the press conference — and what he meant in plain English.

“Both sides of the mandate are calling for us to move steadily away from the very highly accommodative policies we put in place during the challenging economic conditions that the economy faced early in the pandemic.”

The Fed has two mandates: maximum employment and price stability. Here he’s saying that the job market is healthy and inflation is high, both of which point to a need for raising rates. In short: the economy is doing so well that it doesn’t need as much help anymore.

The actual level of rate increases will depend on how inflation behaves throughout the year and whether it starts to come down from its nearly four-decade high of 7 percent last month. Speculation that the increases could be steeper and more frequent, or that the Fed will soon start shedding some of its $9 trillion in assets, has rattled some investors. The Fed chief did leave the door open to more aggressive action, but the word “steadily” here is notable: It suggests that the Fed doesn’t currently anticipate really aggressive rate hikes.

“The ultimate focus that we have is on the real economy. ... We look at broader financial conditions, not one or two markets.”

Stock prices have wildly fluctuated in recent days, with investors concerned over how far the Fed might go to curb companies' borrowing. But declines in stocks, in and of themselves, won’t bother the Fed if they’re just a reflection of investors preparing for what’s to come. However, if stocks drop drastically, or if bonds start signaling recession fears, that could have real implications for prices and jobs in a way that might make the Fed reconsider its path.

The test, Powell said, is whether market behavior is “both persistent and material enough of a change in financial conditions that they are inconsistent with the achievement of our goals.”

“Since the December meeting I would say that the inflation situation is about the same, but probably slightly worse. ... That’s been the pattern.”

The Fed's previous argument that inflation would be temporary was based on the idea that supply-chain disruptions would improve as the pandemic subsided. But Powell said these production and shipping delays weren't really getting any better yet, and prices continue to rise at a rapid clip. This suggests that the Fed is trying to head off even higher inflation, which Powell characterized as a very real risk.

He did say he expects supply-chain issues to improve in the second half of the year, but said that would only represent “progress,” not a complete resolution of the situation.

“There’s quite a bit of room to raise interest rates without threatening the labor market. This is by many measures a historically tight labor market.”

The point of raising interest rates is to rein in spending to tamp down inflation. The current price surges have appeared because of skyrocketing demand that has overwhelmed supply amid production and shipping delays. But healthy consumer demand is also key to any economic recovery. A crucial question is the extent to which higher rates will slow hiring and wage increases.

Powell was upbeat about how rapidly the labor market has healed, with unemployment dropping to 3.9 percent in December, not far from the pre-pandemic low, and a record 6.4 million jobs created in the past year. But the Fed has often caused recessions in its efforts to bring down inflation. Here he’s saying that the job market is strong enough to withstand higher borrowing costs.

“[T]his is a very different expansion, as I've said a couple times, with higher inflation, higher growth, a much stronger economy. I think those differences are likely to be reflected in the policies that we implement.”

Here Powell seems to be suggesting that the Fed could raise interest rates a lot faster than it did the last time around, when it followed through with nine quarter-point increases between December 2015 and December 2018. Again the message here is: We think we need to raise rates, and we also think the economy can take it.

Kate Davidson contributed to this report.