Federal Reserve Chairman Jerome Powell said on Tuesday that high inflation could make it harder to restore the job market to full health, warning that the Fed will raise interest rates sharply if needed to curb rising prices. .
Squeezed by higher costs for food, gas, rent, autos and many other items in US households, the Fed is under pressure to rein in inflation by raising rates to cover slower borrowing and spending. At the same time, the economy has recovered enough that the Fed’s ultra-low-interest rate policies are no longer needed.
“If we have to raise interest rates further over time, we will,” Powell said during a hearing of the Senate Banking Committee, which is considering his nomination for a second four-year term.
The tough challenge for Powell, if he is confirmed for a new term, as expected, was underscored by the questions he faced on Tuesday from both Democratic and Republican senators. They pressured him to raise rates to reduce inflation, though without raising the cost of borrowing so much that the economy fell into recession.
Fed officials forecast three hikes in their benchmark short-term rate this year, though some economists say they envision four hikes in 2022.
Powell’s nomination is expected to be approved by committee in the coming weeks and then confirmed by the full Senate with bipartisan support. At Tuesday’s hearing, he received mostly supportive comments from senators on both sides. A Republican first elevated to the chair by then-President Donald Trump, Powell has been credited by many Democrats for sticking with ultra-low-rate policies over the past 18 months to support rapid recruitment.
In his testimony, Powell rejected suggestions from some Democratic senators that raising rates would reduce hiring and potentially leave many people, especially low-income and black Americans, without jobs. Fed rate increases typically raise borrowing costs on many consumer and business loans and have the effect of slowing the economy.
But Powell argued that rising inflation, if it persists, also poses a threat to the Fed’s goal, which wants to get nearly everyone back to work. Low-income households have been particularly hurt by the rise in inflation, which has wiped out the wage hikes that many have received.
“High inflation is a serious threat to the achievement of maximum employment,” he said.
The economy, the Fed chairman said, must grow for an extended period of time to get more Americans back to work. He said that in order to sustain the expansion of the economy, it is necessary to control inflation before it can be contained. If prices continue to rise, the Fed could be forced to apply the brakes by rapidly raising interest rates, hiring and threatening growth.
Powell won praise from the committee’s chairman, Ohio Democratic Sen. Sherrod Brown, and Pennsylvania Sen. Pat Tommy, the senior Republican on the panel.
“The president is putting the consequences on partisanship, re-nominating the Federal Reserve chairman of another political party,” Brown said. “With President Biden as president, he has helped us deliver historic economic progress.”
“There is widespread bipartisan support for the re-nomination of President Powell,” Tommy said.
Still, Toomey criticized some of the Fed’s 12 regional banks, which held events addressing climate change and “so-called racial justice”, which, Toomey argued, went far beyond the Fed’s mandate. Gone. He cited an event organized by the Federal Reserve Bank of Boston, in which he said participants asked the police to save.
“The Fed’s disturbing politicization threatens its independence and effectiveness,” Tomei said.
And Sen. Richard Shelby, an Alabama Republican, criticized Powell for his early characterization of central bank price hikes, which began this spring as “transient.”
“I worry that if the Fed misses the boat in addressing inflation too soon, so will many of us,” Shelby said. “As a result of that, the Fed has lost a lot of credibility under your leadership.”
Inflation has hit the highest level in four decades, and on Wednesday the government is expected to report that consumer prices have risen 7.1% over the past 12 months, the biggest jump since 1982.
Powell said the Fed mistakenly expected that supply chain bottlenecks driving up the prices of goods such as cars, appliances and furniture wouldn’t last nearly as long as they have. Once unheard, prices of things like used cars, which have gone up in the past year, will come back down, he said.
But for now, those supply chain problems remain, and there are signs they are loosening up, with Powell saying progress is limited. He said several cargo ships are parked outside the port of Los Angeles and Long Beach, the country’s largest, waiting to be unloaded.
Powell said the number of people working or looking for work is also well below pre-pandemic levels. Millions of Americans are retiring early or running out of jobs over fears of the coronavirus. The Fed had projected that more people would return to the workforce than they did.
The small workforce has forced businesses to pay very high salaries to attract and retain employees. That’s mainly why prices aren’t higher right now, Powell said, but that “could be an issue going forward for inflation.”
Economists and former Fed officials are raising concerns that the Fed is behind the curve on inflation. Last Friday’s jobs report for December, which showed a sharp drop in the unemployment rate to a healthy 3.9%, and unexpected wage increases have helped allay those concerns. While lower unemployment and higher wages benefit workers, those trends could potentially lead to rising prices by encouraging more spending.
At the Fed’s most recent meeting in December, Powell said the central bank was rapidly ramping up its efforts to strengthen credit, with the goal of reining in inflation. The Fed will stop buying billions of dollars worth of bonds in March, ahead of its previously announced target of doing so in June. The purpose of those bond purchases is to encourage more borrowing and spending by lowering long-term rates.
And Fed officials are expected to raise short-term rates three times this year, reflecting a sharp change from September, when they were divided on doing it even once.
The flood of new micron infections will not slow the Fed’s shift toward policies that are more appropriate for the economy to return to normal, Powell said at the hearing, because so far it does not burden the economy.
“It really is time for us to move from those emergency pandemic settings to a more normal level,” he said. “It’s a long road from where we are to getting back to normal.”
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