‘If we have to raise interest rates more over time, we will’

Federal Reserve Chairman Jerome Powell told Congress on Tuesday that if the pace of rate increases did not decrease, the central bank would get bolder as short-term borrowing costs increase.

“If we see inflation continuing at high levels, for longer than expected, and if we have to raise rates more over time, we will,” Powell said at a Senate Banking Committee hearing.

Powell faces the Senate for re-nomination. President Joe Biden announced in November that he would transition to Powell for a second term at the helm of the central bank, with current Fed Governor Lyle Brainard serving as vice president (a confirmation hearing is scheduled for Thursday).

The stakes are high for the Federal Reserve this year, with inflationary data showing prices rising at a roughly 7% year-over-year rate.

The Fed has spent the past year or so trying to figure out how much of these price increases are due to increased demand (allowing producers to raise prices) or constrained supply (as COVID disruptions increase production input costs).

Powell said that both contribute to higher inflation, but the Fed chair acknowledged that demand is “very strong” for now.

FILE – Federal Reserve Chairman Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill in Washington, Tuesday, November 30, 2021. Tuesday, January 11, 2022, as he is sure to face tough questions on the subject. (AP Photo/Andrew Harnik, File)

Interest rates remain the Fed’s most effective tool, which the central bank has stuck to zero since the depths of the pandemic. Raising interest rates can address higher demand by making borrowing more expensive. But higher borrowing costs likely won’t do much to address supply problems such as shipping bottlenecks in the world’s ports.

We can influence the demand side, we cannot influence the supply side. “This is really a combination of the two,” Powell said.

It’s time to quit

Fed watchers say the central bank is moving quickly to advance its efforts to roll back easy money policies in the pandemic era.

In addition to maintaining zero interest rates, the central bank has sucked trillions of dollars from US Treasuries and agency mortgage-backed securities. The so-called quantitative easing program acts as a messenger to markets about its intent to keep policies ‘appropriate’.

In the face of inflation, the Fed is now planning to end this program earlier than expected (with the current plan set to end all purchases by March). The Fed will then consider raising interest rates.

For the Federal Reserve, which also prioritizes the health of the labor market, the continued pace of monthly job increases has given policymakers confidence that they can tighten policies without disrupting employment.

“It is really time for us to start moving away from these pandemic emergencies to a more normal level. They shouldn’t really have negative effects on the labor market,” Powell said.

Powell is expected to go through the confirmation process, which will first include an examination of the Senate Banking Committee, followed by a full vote of the 100-member Senate.

Powell has a proven track record of securing bipartisan support through several administrations. Republican by affiliation, Powell was confirmed to the Federal Reserve as governor during the Obama administration, receiving 74 to 21 votes in 2012. When Trump chose Powell to replace Janet Yellen as Fed Chair, Powell easily secured confirmation at 84 to 13 votes .

Brian Cheung is a reporter covering the Federal Reserve, economics, and banking at Yahoo Finance. You can follow him on Twitter Tweet embed.

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