WASHINGTON — Federal Reserve Chairman Jerome Powell on Wednesday sought to reassure the public that the Fed will raise interest rates high enough and fast enough to curb inflation, without tightening credit to the point of strangle the economy and cause a recession.
Testifying before the Senate Banking Committee, Powell faced skeptical questions from members of both parties about the Fed’s ability to control inflation, which has become the top concern of Americans ahead of the congressional election.
Democrats wondered if the Fed’s accelerated rate hikes would succeed in curbing inflation or instead could simply tip the economy into a slowdown. Several Republicans have accused Powell’s Fed of moving too slowly to start raising rates and now needs to accelerate its hikes.
Powell acknowledged that a recession is possible as the Fed pushes borrowing costs steadily higher.
“It’s definitely a possibility,” he said in response to a question from Sen. John Tester, a Democrat from Montana. “It’s not our intended outcome, but it’s certainly a possibility.”
Powell stressed that the Fed’s main objective was to reduce inflation, but said he still hoped to achieve a “soft landing” – a reduction in inflation and a slowdown in growth without triggering a recession and high unemployment.
“We think it’s absolutely essential to restore price stability, really for the benefit of the labor market as much as for anything else,” Powell said during the first of two days of testimony as part of the semi-annual report. the Fed to Congress.
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He said the pace of future rate hikes will depend on whether — and how quickly — inflation begins to decline, which the Fed will assess on a “meeting-by-meeting” basis.
The acceleration of central bank rate hikes – it started with a quarter-point hike in its short-term policy rate in March, then half a point in May, then three-quarters of a point last week – alarmed investors and led to sharp decline in financial markets.
Powell’s testimony comes exactly a week after the Fed announced its three-quarter point hike, its largest hike in nearly three decades, in a range of 1.5% to 1.75%. With inflation at a 40-year high, Fed policymakers are also forecasting a faster pace of rate hikes this year and next than they forecast three months ago, with its key rate hitting 3, 8% by the end of 2023. That would be its highest level in 15 years.
Concerns are growing that the Fed will eventually tighten credit to the point of triggering a recession. This week, Goldman Sachs put the probability of a recession at 30% over the next year and 48% over the next two years.
A senior Republican banking committee official, Sen. Thom Tillis of North Carolina, on Wednesday accused Powell of taking too long to raise rates, saying the Fed hikes are “long overdue” and that his rate short-term benchmark should go much higher.
“The Fed has largely locked itself into a menu of purely reactive policy measures,” Tillis said.
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Tillis, like many Republicans, also accused President Joe Biden’s $1.9 trillion financial stimulus package, approved in March 2021, of being excessively large and exacerbating inflation. Many economists agree that the extra spending contributed to higher prices by amplifying demand even as supply chains were hampered by COVID-related shutdowns and labor shortages drove up wages. Inflationary pressures were further aggravated by Russia’s invasion of Ukraine.
Biden on Wednesday called on Congress to suspend U.S. gasoline and diesel taxes for three months to lessen the impact of high pump prices, which average nearly $5 a gallon. Many economists are skeptical that consumers will see any benefits from a tax holiday on the 18.4 cents per gallon gas tax.
Public concern over inflation has weakened Biden’s approval ratings and increased the likelihood of Democratic losses in November. While taking some steps to try to lessen the burden of inflation, the President underscored his belief that the ability to rein in inflation rests primarily with the Fed.
At Wednesday’s hearing, Sen. Elizabeth Warren, a Democrat from Massachusetts, challenged Powell’s rate hike plans and asked if they would cut gasoline or food prices, some of the driving forces behind them. more important than inflation. Powell acknowledged that they would not.
Instead, Powell said higher borrowing costs for things like mortgages, auto loans and credit cards, resulting directly from Fed hikes, can help dampen consumer demand and inflationary pressures.
Still, Warren and other Democrats have argued that the Fed’s approach risks weakening the economy and increasing unemployment even as war in Ukraine keeps gas and food prices low. raised. Such a dynamic would resemble the dreaded “stagflation” of the 1970s.
“You know what’s worse than high inflation with low unemployment? she asked. “High inflation and a recession with millions out of work.”
“I hope you think about that before you knock the US economy off a cliff,” Warren added.
Warren said Biden’s efforts to fight inflation, like trying to clean up clogged supply chains and increasing the use of antitrust rules to break up monopolies, would more effectively combat rising prices.
At a press conference last week, Powell suggested that a half- or three-quarter-point rate hike would be considered at the Fed’s next meeting in late July. Either would exceed the Fed’s quarter-point hikes that have been typical in the past, and they reflect the central bank’s struggle to rein in high inflation as quickly as possible.
Anticipating further significant rate hikes to come, investors pushed Treasury yields sharply higher, making borrowing costs for home purchases, in particular, more expensive. With the average 30-year fixed mortgage rate hitting around 5.8%, nearly double the rate from just a year ago, home sales have weakened. Credit card and auto users are also being hit by higher borrowing costs.
Powell also said on Wednesday that the Fed still sees no sign of a significant slowdown in inflation, even though some price measures, excluding gasoline and food, have slowed slightly over the past four months. month.
“We’re looking for that,” he said. “We don’t see it yet.”