Warning that high inflation could make it more difficult to restore the job market, Federal Reserve Chairman Jerome Powell said on Tuesday that the Fed would raise interest rates faster than it now forecasts if necessary to stem the surge in prices.
With U.S. households pressed by rising costs for food, gasoline, rents, cars and many other items, the Fed is under pressure to curb inflation by raising rates to slow borrowing and debt. expenses. At the same time, the economy has recovered enough that the Fed’s ultra-low interest rate policies are no longer necessary.
“If we need to raise interest rates further over time, we will,” Powell said at a Senate Banking Committee hearing, which is considering his appointment for a second four-year term.
The difficult challenge for Powell if he is confirmed for a new term, as scheduled, was underscored by questions he faced on Tuesday from Democratic and Republican senators. They urged him to raise rates to reduce inflation, but not to raise borrowing costs to the point that the economy fell into recession.
Fed officials have forecast three hikes to their short-term benchmark rate this year, although some economists say they are planning up to four hikes in 2022.
Powell’s appointment is expected to be approved by the committee in the coming weeks and then confirmed by the entire Senate with bipartisan support. At Tuesday’s hearing, he drew most favorable comments from senators on both sides. A Republican first elevated to the presidency by President Donald Trump, Powell has also been credited by many Democrats for sticking to ultra-low rate policies to support quick hiring over the past 18 months.
In his testimony, Powell rejected suggestions by some Democratic senators that the rate hikes would weaken hiring and potentially leave many people, especially low-income people and black Americans, out of work. Fed rate hikes typically increase borrowing costs for many consumer and business loans and have the effect of slowing the economy.
But Powell argued that the rise in inflation, if it persists, also poses a threat to the Fed’s goal of getting almost everyone back to work. Low-income families have been hit particularly hard by soaring inflation, which wiped out the wage increases many enjoyed.
“High inflation is a serious threat to achieving maximum employment,” he said.
The economy, the Fed chairman added, must grow for an extended period to get as many Americans back to work as possible. Controlling inflation before it takes root is necessary to keep the economy expanding, he said. If prices continue to rise, the Fed could be forced to brake much harder by raising interest rates sharply, threatening hiring and growth.
Powell received praise from Democratic Senator from Ohio, Sherrod Brown, chair of the committee, and from Pennsylvania Senator Pat Toomey, the panel’s top Republican.
“The president puts results before partisanship, by reappointing a Federal Reserve chairman from the other political party,” Brown said. “As president, along with President Biden, he has helped us achieve historic economic progress.”
“There is broad bipartisan support for President Powell’s re-appointment,” Toomey added.
Yet Toomey also criticized some of the Fed’s 12 regional banks for staging events dealing with climate change and “so-called racial justice,” which Toomey said went well beyond the Fed’s mandate. . He cited an event, hosted by the Federal Reserve Bank of Boston, in which he said attendees called for police funding.
“The disturbing politicization of the Fed puts its independence and effectiveness at risk,” Toomey said.
And Sen. Richard Shelby, a Republican from Alabama, criticized Powell for the central bank’s initial characterization of the price spikes that began this spring as “transient.”
“I’m worried if the Fed missed the boat to tackle inflation earlier, a lot of us are,” Shelby said. “As a result, the Fed under your leadership has lost a lot of credibility.”
Inflation has hit its highest level in four decades, and on Wednesday the government is expected to announce that consumer prices have jumped 7.1% in the past 12 months, believed to be the largest since 1982.
Powell said the Fed mistakenly expected supply chain bottlenecks driving up the prices of goods such as cars, appliances and furniture to not last as long as they did. did. Once off the hook, the prices of things like used cars, which have skyrocketed over the past year, would come back down, he said.
But for now, these supply chain issues have persisted, and while there are signs of easing, Powell said progress was limited. He noted that many cargo ships remain moored outside the Port of Los Angeles and Long Beach, the largest in the country, awaiting unloading.
The number of people working or looking for work also remains well below pre-pandemic levels, Powell noted. Millions of Americans have taken early retirement or are avoiding their jobs for fear of the coronavirus. The Fed predicted that more of these people would return to the workforce than they did.
The shrinking workforce has forced companies to offer much higher wages to attract and keep employees. Powell said that was not primarily the reason prices are high right now, but it “may be a problem for inflation in the future.”
Economists and former Fed officials fear the Fed is lagging behind inflation. Last Friday’s jobs report for December, which showed a sharp drop in the unemployment rate to a healthy 3.9%, and an unexpected rise in wages, helped fuel those concerns. While lower unemployment and higher wages benefit workers, these trends can potentially fuel higher prices by encouraging more spending.
At the Fed’s last meeting in December, Powell said the central bank was quickly ramping up efforts to tighten credit in a bid to bring inflation under control. The Fed will stop buying billions of dollars in bonds in March, ahead of its previously announced target of doing so in June. These bond purchases were meant to encourage more borrowing and spending by lowering long-term rates.
And the expectation by Fed officials that they will hike short-term rates three times this year marks a radical departure from September, when they were divided over doing it only once.
The flood of new omicron infections will not slow the Fed’s move towards more appropriate policies for the economy to return to normal, Powell said during the hearing, because so far it doesn’t seem not weigh on the economy.
“It is really time for us to move from these pandemic emergency settings to a more normal level,” he added. “It’s a long way to normal from where we are.”