Fed considering half-point rate increases to curb US inflation, says Powell

US Federal Reserve chairman Jerome Powell outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half percentage-point interest rate increases while describing the labour market as overheated.

“I would say that 50 basis points will be on the table for the May meeting,” Mr Powell said at a panel discussion hosted by the International Monetary Fund on Thursday in Washington, which also included European Central Bank president Christine Lagarde and other officials.

Demand for workers is “too hot, you know; it is unsustainably hot", he said.

The Fed chief is taking direct aim at strong demand that the central bank wants to cool.

It is a strategy that bears considerable risk for US workers and the economy’s overall growth prospects in the coming months, as well as for the Fed itself in a year of midterm congressional elections, with inflation a major concern among ordinary Americans.

“This is going to be a very close call on whether we get a recession or not,” said Ethan Harris, head of global economics at Bank of America Securities.

“They have to get monetary policy into tight territory and they probably need to get some kind of rise in the unemployment rate.”

Mr Powell also reinforced expectations for another half-point increase in June by citing minutes from last month’s policy meeting that said many officials had noted “one or more” 50 basis-point increases could be appropriate to curb the hottest inflation in four decades.

“There is something in the idea of front-end loading” moves if appropriate, “so, that points in the direction of 50 basis points being on the table”, Mr Powell said.

Investors are betting on half-point increases in May, June and possibly July. Rising yields, in turn, have unsettled the stock market, with the S&P 500 Index closing down 1.5 per cent on Thursday.

Mr Powell’s St Louis Fed colleague James Bullard has also opened a debate about doing a more aggressive 75 basis-point increase if needed, while even normally dovish officials such as San Francisco’s Mary Daly have said that a “couple” of half-point moves look likely.

Mr Powell “approved a 50 basis-point hike in May, but I think June is also there and maybe even more”, said Yelena Shulyatyeva, senior US economist for Bloomberg Economics.

To some, it is too little, too late. Critics say that US central bankers are caught in a policy bind of their own making.

Prices began to accelerate in the fourth quarter of 2021, when employers shrugged at the latest wave of the coronavirus and added more than a 500,000 workers each month to their payrolls.

Wage gains picked up and demand strengthened, broadening inflation pressures throughout the economy even as the Fed continued to add stimulus by holding rates near zero and buying bonds.

Policymakers last year wanted to avoid pre-emptive tightening but the combination of fiscal stimulus, monetary support and a bounce-back in demand put them behind inflation pressures that were well under way.

The consumer price index rose 8.5 per cent in March from a year earlier, the most since 1981; the Fed’s target is based on a separate measure known as the personal consumption expenditures price index, which rose 6.4 per cent for the year through February.

Russia’s military offensive in Ukraine is expected to raise food and energy prices further.

A supermarket in Rosemead, California. US inflation hit a four-decade high in March and the prices of staples are expected to continue to rise. AFP

Now, Fed officials are scrambling to raise interest rates to a level that does not add further stimulus, and possibly push forward into restrictive territory.

The Fed will no longer forecast relief from goods prices and improving supply chains, Mr Powell said, which could be an acknowledgement that pressures have also disbursed into service prices as well.

“I just don’t understand why they did this,” Mr Harris said. “They had many chances to take the off-ramp and they never did.”

Another uncertainty in policy strategy is what happens to financial conditions when officials start running assets off their balance sheet.

Fed officials have signalled this process will be announced in May, with the run-off stepping up to $95 billion a month combined for Treasuries and mortgage-backed securities.

There is no reliable estimate about how much tightening the run-off will add, Ms Shulyatyeva said.

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Ten tax points to be aware of in 2026

1. Domestic VAT refund amendments: request your refund within five years

If a business does not apply for the refund on time, they lose their credit.

2. E-invoicing in the UAE

Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.

3. More tax audits

Tax authorities are increasingly using data already available across multiple filings to identify audit risks.

4. More beneficial VAT and excise tax penalty regime

Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.

5. Greater emphasis on statutory audit

There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.

6. Further transfer pricing enforcement

Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.

7. Limited time periods for audits

Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.

8. Pillar 2 implementation

Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.

9. Reduced compliance obligations for imported goods and services

Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.

10. Substance and CbC reporting focus

Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.

Contributed by Thomas Vanhee and Hend Rashwan, Aurifer