Jerome Powell Says Fed Is Prepared to Raise Rates to Tame Inflation

Jerome H. Powell, Federal Reserve Chairman, told lawmakers on Tuesday that the rapidly recovering economy no longer needed much help from the central bank and that keeping inflation in check — including raising interest rates — would be critical to enabling a stable expansion that benefits Laborers.

Mr. Powell, who was recently nominated by President Biden for a second term as president, is facing a complex economic moment as he heads toward another four-year term as head of the world’s most powerful central bank. He offered his final thoughts on the Fed’s challenge during a confirmation hearing before the Senate Banking Committee.

The economy is growing fast, but it has been hit by repeated waves of the coronavirus and a sudden spike in inflation that has proven to be stronger and longer-lasting than economists had expected. Workers find jobs and earn wage increases, but rising costs for housing, gas, food, and furniture are undermining shoppers and undermining consumer confidence.

The Fed is tasked with maintaining price stability, and its officials recently indicated that they may raise interest rates several times this year in an effort to calm the economy and prevent a rapid rate hike from becoming permanent. Mr. Powell – who is widely expected to get confirmation – reiterated that commitment on Tuesday.

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

But the central bank also has a second mandate: it is supposed to steer the economy toward full employment, a situation in which people who are willing and able to work can find jobs. Cooling down the economy can slow employment, so trying to promote a strong labor market and trying to pave the way for a strong labor market can require balancing action by policy makers.

Mr. Powell squared off the two goals in his testimony, noting that keeping price gains in check would be critical to achieving a strong and sustainable job market.

“High inflation is a serious threat to the maximization of employment opportunities,” he said.

If rapid price gains begin to become “entrenched in our economy,” Powell said, the Fed may have to react aggressively to stifle hyperinflation and risk triggering a recession. To avoid a painful policy response, and instead pave the way for a strong labor market in the future, he added, it is important to control inflation.

“If inflation becomes very persistent, and if these high levels of inflation take hold in our economy, in people’s thinking, it will inevitably lead to monetary policy that is much tighter than ours, and may lead to a recession, and that will be,” Mr. Powell said.

Economists increasingly expect Federal Reserve officials to make three or four interest rate increases in 2022, steps that would make borrowing costly for households and businesses and slow spending and growth. This, in turn, can dampen employment, prevent wages from growing quickly, and lead to lower prices over time as people shop less.

The Fed’s rate increases will come on top of other moves aimed at preventing the economy from overheating: Officials are slowing large bond purchases they’ve been using to lower long-term interest rates and stimulate growth, and policymakers have indicated they may start. to reduce its holdings of bonds this year.

They can do so passively, allowing the bonds to mature without reinvesting, or they can actively sell assets. Mr. Powell left the door open to either possibility on Tuesday. If the Fed trims balance sheet holdings, it will reinforce the upward move in interest rates, further cooling the economy.

“The committee hasn’t made any decisions about the timing of any of that – I think we’re going to have to be a little bit humble and smart,” Powell said.

He noted that all members of the Federal Reserve’s policy setting committee expect interest rates to rise this year, but the number of increases will depend on how the economy develops. Officials made clear that higher borrowing costs may come soon.

Loretta Meester, the Cleveland Fed president and official who has traditionally favored a rate hike more than many of her colleagues, told Bloomberg Television on Tuesday that she would prefer to start raising rates in March and that she expects three moves this year. Rafael Bostic, president of the Federal Reserve Bank of Atlanta, also indicated in an interview with Reuters that a policy change in March may be appropriate.

The prospect of higher interest rates has worried equity investors recently. High rates discourage risky investments such as stocks, and can limit corporate earnings growth. Wall Street’s major indexes moved between losses and gains on Tuesday as Mr. Powell spoke.

The Fed’s latest and decisive move toward anti-inflation mode can be reinforced by its inflation report, due for release on Wednesday, which is expected to show the fastest growth in consumer prices since June 1982.

Mr. Powell emphasized that inflation was high because consumer demand for goods was strong and because the supply of goods and services had been seriously disrupted: the pandemic had closed factories, shipping routes couldn’t keep pace with consumers buying more imported goods, and businesses in some cases struggled To hire workers to expand production and services.

Powell said the Fed can help cool demand with its tools, but he also hopes supply will bounce back as companies learn to live with the new backdrop created by the pandemic.

Keeping inflation under control “will require us to use our tools, to the point where they work on the demand side, while also expecting some help from the supply side,” he said.

However, predicting the trajectory of inflation has been a perilous task during the pandemic. The Fed initially predicted that inflation would rise as early as 2021 and then fade away, but policymakers — like many private sector forecasters — got it wrong.

“We’re not really seeing, yet, the kind of progress all forecasters really thought we were going to see now,” Powell said, at least when it comes to crowded supply chains.

“People want to buy cars – automakers can’t make more cars, because there are no semiconductors,” he said, stressing the extraordinary period the epidemic has gone through. “This has never happened.”

Some Republicans, including Senator Patrick J. Tommy of Pennsylvania, worried that the Fed may have moved too slowly to resist price gains, thanks in part to the new employment-focused policy approach that Powell initiated.

“I am concerned that the Fed’s new monetary policy framework is causing it to fall behind the curve,” said Tommy. But he then praised the Fed for adjusting its stance as conditions developed, and inflation showed signs of turning around.

Subhadra Rajapa, head of US interest rate strategy at Societe Generale, said investors did not appear to share the concern that the central bank would not be able to bring the situation back under control. It noted that inflation expectations priced in financial assets were stable, as investors look for four price increases this year.

She said the markets “at least believe they will be able to raise interest rates and reduce the risks of hyperinflation.”

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