Jerome Powell says Fed is ready to hike rates to bring inflation under control

Federal Reserve Chairman Jerome H. Powell told lawmakers on Tuesday that a rapidly recovering economy no longer needed so much help from the central bank and control of the inflation, including by raising interest rates, would be essential to enable stable expansion. which benefited workers.

Mr Powell, whom President Biden recently appointed to a second term as president, faces a complicated economic moment as he heads to another four-year term as the head of the most powerful central bank in the country. world. He provided his final thoughts on the Fed’s challenge during his confirmation hearing before the Senate Banking Committee.

The economy is growing rapidly, but it has been rocked by repeated waves of coronavirus and a spike in inflation that has proven to be stronger and more lasting than economists expected. Workers find jobs and get pay increases, but rising costs for housing, gas, food and furniture are squeezing buyers and undermining consumer confidence.

The Fed is responsible for maintaining price stability, and its officials recently signaled that they may hike interest rates several times this year in an attempt to cool the economy and prevent the rapid rise in prices from becoming permanent. Mr Powell – who is widely expected to be confirmed – reiterated that commitment on Tuesday.

“If we see inflation persist at high levels for longer than expected, if we need to raise interest rates further over time, we will,” said Powell.

But the central bank also has a second mandate: it is supposed to steer the economy towards full employment, a situation in which people who want to work and can do so can find jobs. Cooling the economy can slow hiring, so trying to foster a strong job market and trying to set the stage for a strong job market may require a balancing act for policymakers.

Mr Powell squared the two goals in his testimony, suggesting that controlling price increases would be essential to achieving a sustainably strong labor market.

“High inflation is a serious threat to achieving maximum jobs,” he said.

If rapid price hikes begin to “take hold in our economy,” the Fed may have to react harshly to stifle soaring inflation and risk triggering a recession, Mr Powell said. To avoid a painful policy response and instead set the stage for a strong future labor market, he added, it is important to control inflation.

“If inflation becomes too persistent, if these high levels of inflation take hold in our economy and in the thinking of people, then inevitably it will lead to a much stricter monetary policy on our part, and it could lead to a recession, and that would be bad for workers, ”said Powell.

Economists increasingly expect Fed officials to make three or four interest rate hikes in 2022, measures that would make borrowing costly for households and businesses and slow spending and growth. growth. This could, in turn, weaken hiring, prevent wages from rising so quickly, and keep prices down over time as people buy less.

Fed rate hikes would come on top of other measures meant to keep the economy from overheating: Officials are slowing big bond purchases they were using to lower long-term interest rates and fuel growth, and policymakers have signaled they may start reducing their bond holdings this year.

They could do this passively, allowing the bonds to mature without reinvesting, or they could sell assets. Mr Powell left the door open to either possibility on Tuesday. If the Fed reduces these balance sheet holdings, it will boost interest rate hikes, further cooling the economy.

“The committee hasn’t made a decision on the timing of all of this – I think we’ll have to be both humble and a little nimble,” Powell said.

He noted that all members of the Fed’s policymaking committee expected to raise interest rates this year, but the number of increases will depend on how the economy evolves. Officials have made it clear that borrowing costs may soon rise.

Loretta Mester, chairman of the Cleveland Federal Reserve and an official who has traditionally favored more interest rate hikes than many of her colleagues, told Bloomberg Television on Tuesday that she would support rate hikes beginning in March and that she expected three movements this year. Raphael Bostic, chairman of the Atlanta Federal Reserve, also said in an interview with Reuters that a policy rate change in March may be appropriate.

The prospect of rising interest rates has pissed off stock investors lately. Higher rates discourage risky investments like stocks and can dampen corporate profit growth. The main Wall Street benchmarks hovered between losses and gains on Tuesday as Mr Powell spoke.

The recent and decisive move by the Fed towards a mode of fighting inflation could be reinforced by an inflation report, due for release on Wednesday, which is expected to show the fastest growth in consumer prices since June. 1982.

Mr Powell pointed out that inflation has been high both because consumer demand for goods has been strong and because the supply of goods and services has been seriously disrupted: the pandemic has closed factories, Shipping routes have not been able to keep up as consumers buy more imported goods, and companies have, in some cases, struggled to hire workers to expand production and services.

The Fed can help cool demand with its tools, but it is also hoping that supply will rebound as businesses learn to cope with the new environment created by the pandemic, Powell said.

Keeping inflation under control will “force us to use our tools, as long as they work on the demand side, while we also wait for help on the supply side,” he said. .

Yet predicting the path of inflation has been a difficult task during the pandemic. The Fed initially predicted that inflation would rise in early 2021 and then subside, but policymakers – like many private sector forecasters – were wrong.

“We’re not really seeing the kind of progress yet that all forecasters really thought they were seeing right now,” said Powell, at least when it comes to booming supply chains.

“People want to buy cars – automakers can’t make cars anymore because there are no semiconductors,” he said, noting how unusual the pandemic has been. “It never happened.”

Some Republicans, including Sen. Patrick J. Toomey of Pennsylvania, feared the Fed had acted too slowly to counter price hikes, in part because of a new jobs-focused policy approach Mr. Powell took. introduced.

“I am concerned that the Fed’s new monetary policy framework has caused it to fall behind,” Toomey said. But he then praised the Fed for adjusting its stance as conditions evolved and inflation showed signs of persisting.

Investors do not seem to share the concern that the central bank will not be able to get the situation under control, said Subadra Rajappa, head of US rate strategy at Societe Generale. She noted that inflation expectations embedded in financial assets were stable, with investors looking for around four rate hikes this year.

The markets “at least think they are going to be able to raise rates and limit the risk of runaway inflation,” she said.

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