Fed Chairman Jerome Powell admitted that the Federal Reserve’s aggressive rate hikes will not solve two of the biggest problems families face: high gas and grocery prices.
During a hearing in the Senate Banking Committee on Wednesday, Democratic Senator Elizabeth Warren Powell urged to continue with interest rate hikes cautiously and avoid starting a recession that costs millions of jobs.
Warren asked Powell if Fed rate hikes would lower gas prices, which have reached record highs this month.
“I would not believe it,” Powell said.
Warren asked if grocery prices would go down because of the Fed’s war on inflation.
“I would not say that, no,” Powell said.
Warren expressed concern about the impact of the Fed’s rate hikes on families and the risk of a recession.
“Rate increases will not make Vladimir Putin turn his mind and leave Ukraine,” Warren said, adding that they do not want to break corporate monopolies or stop Covid-19.
Warren said interest rate hikes would increase borrowing costs for families and could lead to job losses.
“Inflation is like a disease, and medicine has to be tailored to the specific problem, otherwise you can make things much worse,” Warren said. “Right now, the Fed has no control over the main drivers of rising prices, but the Fed can curb demand by firing many people and making families poorer.”
The Massachusetts Democrat urged Powell to proceed cautiously with further rate hikes.
“Do you know what’s worse than high inflation and low unemployment? There is high inflation with a recession and millions of people without jobs, Warren said. “I hope you consider it before you run this economy off a cliff.”
Senators from both sides of the aisle tried to blame rising inflation on a number of factors, including pandemic stimulus, wage growth and corporate price increases. However, Powell refused to weigh in on any of the politically heated issues.
“I’m really focused on what we can do, which is to shrink our balance sheet and raise interest rates and get supply and demand back in line and bring inflation back to 2%,” he said.
Powell acknowledged that the high cost of living is inflicting economic pain on Main Street and expressed confidence that the US economy could ride this difficult time.
“In the Fed, we understand the difficulties caused by high inflation,” Powell said in prepared remarks during the Senate Banking Committee hearing on Wednesday. “We are strongly committed to bringing inflation down again, and we are moving fast to do so.”
Powell, whose comments reflected those he made last week at the Fed summit, said that officials plan to continue raising interest rates to control inflation. The Fed’s rate hike last week was the largest since 1994.
“The US economy is very strong and well positioned to handle tighter monetary policy,” the Fed chief said.
Powell faces questions about why the Fed waited until March to raise interest rates and why it felt the need to increase the pace of interest rate hikes.
In his comments, Powell noted that monetary policy requires a recognition that the economy often develops in “unexpected” ways. He said supply constraints had been “greater and longer lasting” than expected, and the war in Ukraine has driven up energy prices.
“Inflation has obviously surprised upside over the past year, and further surprises may be in store,” Powell said. “We must therefore be good at responding to incoming data and the evolving outlook.”
Asked whether interest rate increases could trigger a decline, Powell said it was “definitely an opportunity”, but stressed that it was not the Fed’s “intention”.
Powell, however, admitted that the risk is increasing.
“Frankly, the events of recent months have made it harder for us to achieve what we want, which is 2% inflation and still a strong labor market,” Powell said.
The Fed chief later said he did not think a recession would be needed to curb inflation.
“I do not think we need to provoke a recession, but we think it is absolutely crucial to restore price stability, really for the benefit of the labor market as much as anything else,” he said.
Powell, whose policies have helped trigger a historic housing boom, expects house price gains to decline due to rising mortgage rates.
He told lawmakers that the Fed’s aggressive rate hikes are already slowing the housing market, eating away at housing demand.
“Housing prices should stop rising at such remarkably rapid rates,” Powell said. “Since the beginning of the pandemic, we have had a very, very hot housing market all over the country. As housing demand moderates … you should see prices stop rising. ”
One driving force behind rising house prices was extremely low borrowing costs and the Fed buying hundreds of billions of dollars in mortgages.
Although he expects prices to cool, Powell warned that the Fed does not control the supply of housing and said homebuilders have warned about supply constraints. “There is nothing the Federal Reserve can do about it,” he said.
Another complication is that rising mortgage rates – which are rising at the fastest pace since 1987 – will hurt anyone who wants to buy a home.
“There’s some pain involved in it for people who pay higher mortgage rates,” Powell said. “Some people will be priced out of the mortgage market, but that is ultimately what must happen if we are to return to price stability, to a place where people’s wages are not eaten up by inflation … The biggest pain would be if we let this high inflation continue. ”
Additional reporting by Alicia Wallace