Warning that excessive inflation might make it more difficult to get the job market back on track, Federal Reserve Chair Jerome Powell said Tuesday that if necessary, the Fed will raise interest rates quicker than it now anticipates.
With rising costs for food, petrol, rent, and a variety of other commodities putting pressure on American consumers, the Federal Reserve is under pressure to control inflation by hiking interest rates to reduce borrowing and spending. At the same time, the economy has recovered sufficiently to eliminate the necessity for the Fed’s ultra-low interest rate policy.
Powell said at a hearing before the Senate Banking Committee, which is reviewing his candidacy for a second four-year term, “If we have to raise interest rates more over time, we will.”
Powell faces a significant task if he is approved for a second term, as expected, as seen by the questioning he received from both Democratic and Republican senators on Tuesday. They pushed him to hike rates to combat inflation, but not to the point where borrowing prices skyrocket and the economy enters a recession.
The Federal Reserve expects to raise its benchmark short-term rate three times this year, with some analysts predicting as many as four jumps in 2022.
Powell’s nomination is anticipated to be approved by the committee in the coming weeks, with bipartisan support, and then confirmed by the entire Senate. Senators from both parties spoke up in support of him at the hearing on Tuesday. Powell, a Republican who was appointed to the position by President Trump, has been credited by many Democrats for maintaining ultra-low interest rates to enable fast hiring over the past 18 months.
Powell refuted claims made by several Democratic senators that raising interest rates would stifle employment, perhaps putting many people out of work, particularly the poor and African-Americans. Fed rate hikes typically raise borrowing rates on a wide range of consumer and commercial loans, hurting the economy.
However, Powell noted that if inflation continues to rise, it will jeopardize the Fed’s aim of putting almost everyone who wants a job back to work. The jump in inflation has disproportionately harmed low-income households, wiping away many of the salaries raises they had earned.
“High inflation poses a serious danger to achieving full employment,” he warned.
The economy, according to the Fed chair, must expand for a long time in order to re-hire as many Americans as feasible. In order to keep the economy growing, he says, inflation must be controlled before it becomes entrenched. If prices continue to rise, the Fed may be obliged to press on the brakes even harder by raising interest rates, putting jobs and growth in jeopardy.
Powell received plaudits from Ohio Democratic Sen. Sherrod Brown, the committee’s chairman, and Pennsylvania Republican Sen. Pat Toomey, the panel’s senior Republican.
“By re-nominating a Federal Reserve chair from the opposing political party, the president is prioritizing outcomes over politics,” Brown added. “As chair, he has worked alongside President Biden to help us achieve unprecedented economic achievement.”
“Chairman Powell’s re-nomination has wide bipartisan support,” Toomey noted.
Toomey, though, chastised several of the Fed’s 12 regional banks for conducting events on climate change and “so-called racial justice,” which he claimed went beyond the Fed’s role. He highlighted one gathering, held by the Federal Reserve Bank of Boston, at which participants demanded that police be defunded.
“The Fed’s disturbing politicization jeopardizes its independence and effectiveness,” Toomey said.
Sen. Richard Shelby, a Republican from Alabama, chastised Powell for first characterizing the price rises that began this spring as “transitory.”
“I’m afraid if the Fed missed the boat on handling inflation sooner, a lot of us are,” Shelby added. “As a result, the Fed has lost a lot of trust under your leadership.”
Inflation has reached new highs not seen in four decades, and the government is anticipated to publish on Wednesday that consumer prices increased by 7.1 percent in the last year, the greatest increase since 1982.
According to Powell, the Fed made the error of assuming that supply chain bottlenecks that have pushed up costs for items like vehicles, refrigerators, and furniture would not continue nearly as long as they have. Prices for goods like old automobiles, which have arisen in the last year due to the congestion, will fall back down once the snarl was removed, he claimed.
But for now, those supply chain challenges have remained, and while there is evidence they are loosening, Powell said that improvement is limited. Many cargo ships remain moored outside the nation’s major ports, Los Angeles and Long Beach, awaiting unloading, he said.
Powell also emphasized that the number of individuals working or seeking jobs is still significantly below pre-pandemic levels. Because of the coronavirus, millions of Americans have retired early or avoided working. The Federal Reserve had projected that a greater number of those persons would return to work than had done so.
Because of the reduced workforce, firms have had to provide substantially greater wages to attract and retain people. Powell stated that while this isn’t the major reason for high pricing right now, it “may be a concern for inflation in the future.”
Economists and former Fed officials are worried that the Fed is behind the inflation curve. The December jobs data, which showed a dramatic reduction in the unemployment rate to a healthy 3.9 percent and an unexpected pay increase, has added fuel to such fears. While reduced unemployment and greater income benefit workers, these developments have the potential to fuel price increases by promoting more consumption.
Powell stated during the Fed’s most recent meeting in December that the central bank was significantly escalating its efforts to tighten lending in order to keep inflation under control. The Federal Reserve will stop buying billions of dollars in bonds in March, much ahead of its previously stated objective of June. By decreasing longer-term rates, the bond purchases were designed to promote greater borrowing and spending.
In addition, Fed policymakers plan to raise short-term rates three times this year, a significant reversal from September, when they were split on whether to do so even once.
The Fed’s shift toward policies more appropriate for an economy returning to normal won’t be slowed by the flood of new Omicron infections, Powell said at the hearing, because it doesn’t appear to be weighing on the economy so far.
“It’s past time for us to transition away from those emergency pandemic conditions and return to a more regular level,” he continued. “From here, it’s a long way back to normal.”