‘We should have moved earlier’

The Federal Reserve’s top figure said Thursday that the central bank should have acted sooner to pull back on its pandemic-era stimulus and get ahead of rising inflation.

Fed Chairman Jerome Powell told the Senate Banking Committee that with prices increasing at the fastest clip since 1982, easy money policies from the Fed — combined with longer-than-expected supply chain snags — appear to be behind inflation.

“Hindsight says we should have moved earlier,” Powell said Thursday, adding that “we’re going to use our tools and we’re going to get this done.”

When inflation began popping in early 2021, the Fed brushed the figures off as “transitory” and hoped that supply chains would alleviate and slow further price increases.

But Powell now says higher demand from depressed borrowing costs do appear to be behind inflation, placing the responsibility on the Fed to raise interest rates from the near-zero levels it has maintained since the onset of the pandemic.

Rate hikes

Powell told the House Financial Services Committee Wednesday that the central bank will almost certainly raise interest rates — for the first time since 2019 — at the conclusion of its next policy-setting meeting on March 15 and 16.

But “lifting off” from near-zero interest rates is only the beginning of the battle.

Powell suggested the first rate increase this month will be 0.25%. Estimates from the Fed itself projecting that the economy can withstand short-term interest rates between 2% and 2.5% before policies can be considered restrictive.

With geopolitical uncertainty emerging in Ukraine, the Fed intends on treading carefully as it notches up rates. Although some Wall Street shops had expected the central bank to move at each of the seven remaining meetings this year, some now say the cloudy economic outlook casts doubt on the Fed’s ability to quickly respond to inflation.

“I think it’s going to take this Fed a long time to get right-sized,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments.

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Tengler told Yahoo Finance that she only expects the Fed to raise interest rates three or four times (for a total of 0.75% or 1.00%) this year.

Balance sheet

Another looming question concerns the Fed’s balance sheet, which the central bank has ballooned to $9 trillion. Since the depths of the pandemic, the Fed snatched up trillions in U.S. Treasuries and agency mortgage-backed securities to signal to markets its intention to support the economy.

The Fed is still making purchases, although the program is set to end this month. The next step would involve shrinking its holdings, by letting maturing assets to roll off of its balance sheet.

“We’re going to make progress on agreeing on a plan at [the March] meeting to shrink the balance sheet and I’m confident we will,” Powell told the House Financial Services Committee Wednesday.

Powell is serving as the Fed’s top official in a “pro tempore” capacity because his term as Fed chair expired at the beginning of February. His nomination, along with four other Biden-selected picks for Fed roles, has stalled as Republican senators look deeper into Sarah Bloom Raskin’s bid for Fed vice chairman for supervision.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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