- The Fed is no longer assuming supply-chain problems will heal through the year, chair Jerome Powell said.
- The central bank is now looking for "actual progress" toward a supply recovery as it sets policy, he added.
- The chair also hinted the Fed could raise interest rates more aggressively to better fight inflation.
Solving the global supply-chain crisis would be a huge help for cooling inflation, but the Federal Reserve isn't waiting around for it.
The Fed raised its benchmark interest rate last week from record lows, aiming to ease inflation by cooling off demand. Yet much of the inflation problem comes from the supply side. Shipping delays and supply bottlenecks continue to ensnare the world economy, and with virus cases once again pushing China into partial lockdowns and Russia's invasion of Ukraine roiling commodities markets, economists fear the supply-chain tangle could get worse before it improves.
The bleak outlook has forced the Fed to change its playbook. While the central bank had been hopeful for a recovery for the global supply chain to take hold this year, such improvement is no longer a certainty in the policymaking process. The Fed will now look for "actual progress" with the supply problems and stop assuming "significant near-term supply-side relief," Fed chair Jerome Powell said Monday.
"It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain," Powell said in remarks at a conference hosted by the National Association for Business Economics.
The supply strains have put the Fed in an awkward position this year. Officials previously expected the pressures to abate early in 2022 and lead to weaker inflation as supply better matched demand. Powell characterized pandemic-era inflation as "transitory" through much of 2021, but he has since strayed from the term and said that price pressures were "not as transitory as we had hoped."
Yet the problems have lasted longer than anticipated and are now made worse by the Russia-Ukraine conflict, Powell said. Both countries are key suppliers of important goods including wheat, fertilizer, and oil. With Russia's invasion sparking severe Western sanctions and the souring of trade relationships, it's very likely shortages of certain goods will linger and lift prices further.
The new risks also open the door for a faster rate-hike strategy at the Fed. There is an "obvious need to move expeditiously" to fight inflation, Powell said at the conference. That could come in the form of bigger individual rate hikes than the standard quarter-percent increases, the chair added. That would accelerate the cost of borrowing for everything from credit cards to mortgages even faster than a more conventional inflation-fighting path would.
The majority of Fed policymakers signaled last week that they expect one of those standard quarter-percent hikes at each of the Fed's remaining 2022 policy meetings. Still, if officials "conclude that it is appropriate to move more aggressively," a double-size half-percent hike could be in order, Powell said.
When asked what would "prevent" the Fed from such a hike at the next meeting in May, Powell gave an even clearer answer: "Nothing."