Federal Reserve Chairman Jerome Powell told Congress on Wednesday that the central bank remains committed to keeping interest rate hikes high enough to cool the red. inflationrecognizing that recession is “certainly a possibility”, but insisting that the US economy is robust enough to withstand tighter financial conditions.
With inflation high for decades “well above” the Fed’s long-term target of around 2%, Powell told the Senate Banking Committee that tight monetary policies are needed to ease price pressures and that “you will see rapid and continued progress towards higher rates”.
Finding itself behind the curve of inflation which has risen and stayed high for longer than expected, the Fed recently raised the benchmark federal funds rate by 75 basis points, the biggest jump since 1994. Markets are now pricing a 91% chance of another 0.75 percentage point hike at the Fed next political meeting in July.
Inflation “surprise on the rise”
In his testimony, Powell told lawmakers the pace of future rate hikes will depend on how quickly inflation drops as monetary screws are tightened, with assessments being made “meeting by meeting.”
“Inflation has obviously surprised on the upside over the past year, and more surprises may be in store. So we will need to be nimble in responding to incoming data and changing outlooks,” said the Fed chief, adding that markets have priced in a series of additional rate hikes and “that’s appropriate.”
While the Fed’s tightening of financial conditions may cool demand in an effort to ease price pressures, it is unable to tackle the supply side, where Powell said some of the factors are at risk. the origin of the current surge in inflation.
“The spike in crude oil and other commodity prices that resulted from Russia’s invasion of Ukraine is driving up gasoline and fuel prices and creating additional upward pressure on the inflation,” he said, adding that China’s COVID-19 lockdowns were also contributing to supply chain disruptions.
However, he acknowledged that inflation was already high before the war in Ukraine broke out.
Possible recession but “not the expected result”
The Fed’s pledge to fight inflation by tightening monetary policy settings has raised fears that the economy could tip into recession, with a number of investment banks in recent weeks raising their forecasts for the likelihood of a contraction.
But Powell insisted that the US economy is well positioned to weather the shock of higher rates.
“The US economy is very strong and well positioned to handle tighter monetary policy,” he said, pointing to what he described as an “extremely tight” labor market, with unemployment nearing a 50-year low, job vacancies at near record highs. high levels and solid wage growth.
“Recent indicators suggest that real gross domestic product growth has accelerated this quarter as consumer spending remains strong,” he said, while noting that business investment appears to be slowing and the market housing softens.
Responding to a question about the risk of recession, Powell said it was “definitely a possibility” although “it’s not the expected outcome”.
During testimony, Sen. Elizabeth Warren (D-Mass.) asked Powell if the Fed’s rate hikes would lower gas and food prices.
“I wouldn’t say that, no,” Powell replied.
“From the top of a cliff”
Warren expressed concern that tougher policies would cause companies to cut costs and lay off workers, prompting Powell to respond by saying there were about two vacancies for every available worker in economy and that part of the goal of the Fed’s restrictive policies was “to bring the labor market back into balance.”
Warren then said that given the Fed’s inability to make a big impact on soaring food and energy prices, rate hikes would likely drive millions of Americans out of work and weaken the economy. economy, but inflation would remain high.
“I hope you reconsider before you knock this economy off a cliff,” the senator said.
Economist Peter Schiff reacted to Powell’s testimony in a tweet: “I actually agree with @SenWarren that #Powell’s interest rate hikes won’t cure #inflation, but will cause #recession.”
“But that’s because the #Fed won’t raise rates enough and #Congress and @POTUS won’t help by cutting government spending and repealing regulations,” he added.
The next Fed policy meeting is scheduled for July 26-27.