Jerome Powell says the Fed is prepared to raise interest rates to curb inflation

Jerome H. Powell, the central bank’s chairman, told lawmakers on Tuesday that a rapidly healing economy no longer needed as much help from the central bank, and that keeping inflation in check – including by raising interest rates – would be crucial to enable stable expansion. benefited the workers.

Mr. Powell, who was recently nominated by President Biden for another term as chairman of the board, faces a complicated financial moment as he approaches a new four-year term as head of the world’s most powerful central bank. He came up with his latest thoughts on the Fed’s challenge during his confirmation hearing before the Senate Banking Committee.

The economy is growing rapidly, but it has been hit by repeated waves of the coronavirus and by an increase in inflation that has proved stronger and more lasting than economists expected. Workers find jobs and win wage increases, but the rising costs of housing, gas, food and furniture are pushing customers and lowering consumer confidence.

The Fed is aiming to maintain price stability, and its officials have recently signaled that they could raise interest rates several times this year to try to cool the economy and prevent rapidly rising prices from becoming permanent. Mr. Powell – who is widely expected to win confirmation – reiterated this commitment on Tuesday.

“If we see inflation persist at high levels longer than expected, if we have to raise interest rates more over time, we will do it,” Powell said.

But the central bank also has another mandate: It must lead the economy towards full employment, a situation where people who want to work and are able to do so can find work. Cooling down the economy can slow down employment, so trying to promote a strong labor market and try to facilitate a strong labor market may require a balancing act for decision-makers.

Mr. Powell set the two goals in his testimony, suggesting that keeping price gains under control would be crucial to achieving a sustainable, strong labor market.

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

If rapid price increases begin to become “entrenched in our economy,” the Fed may have to react strongly to stifle current inflation and risk coming into contact with a recession, Powell said. To avoid a painful political response and instead facilitate a strong future labor market, he added, it is important to control inflation.

“If inflation becomes too persistent, if these high levels of inflation become entrenched in our economy and in people’s thinking, it will inevitably lead to much tighter monetary policy from us, and it may lead to a recession, and it will be bad for the workers,” “Mr. Powell.

Economists are increasingly expecting Fed officials to make three or four rate hikes in 2022, measures that will make loans expensive for households and businesses and curb spending and growth. This in turn can weaken employment, prevent wages from growing just as fast and keep prices down over time as people shop less.

The Fed’s rate hikes will come on top of other measures intended to prevent the economy from overheating: Officials are slowing down the large bond purchases they had used to lower long-term interest rates and increase growth, and politicians have signaled that they may begin to shrink bond holdings this year.

They can do it passively so that bonds can mature without reinvesting, or they can sell assets. Mr. Powell left the door open for both opportunities on Tuesday. If the Fed trims these balance sheets, it will amplify the movement higher in interest rates, and cool the economy further.

“The committee has not made any decisions about the timing of any of that – I think we need to be both humble and a little witty,” Mr. Powell said.

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

Loretta Mester, president of the Federal Reserve Bank of Cleveland and an official who has traditionally advocated more rate hikes than many of her colleagues, told Bloomberg Television on Tuesday that she would advocate for incremental rate hikes in March and that she expected three moves this year. . Raphael Bostic, president of the Federal Reserve Bank of Atlanta, also indicated in an interview with Reuters that a policy rate change in March may be appropriate.

The prospect of rising interest rates has annoyed equity investors lately. Higher prices discourage risky investments such as equities, and can dampen the company’s profit growth. Wall Street’s main benchmarks moved between losses and gains on Tuesday as Mr. Powell spoke.

The Fed’s recent and decisive move towards an anti-inflationary mode can be supported by an inflation report, to be published on Wednesday, which is expected to show the fastest growth in consumer prices since June 1982.

Mr. Powell stressed that inflation has been high both because consumer demand for goods has been strong and because the supply of goods and services has been severely disrupted: the pandemic has closed factories, shipping routes have not been able to keep up with consumer purchases. 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 also hopes the supply will return as companies learn to live with the new backdrop the pandemic has created, Powell said.

Keeping inflation under control “will require us to use our tools, to the extent that they work on the demand side, while we also expect some help from the supply side,” he said.

Nevertheless, it has been a difficult task to predict the path of inflation during the pandemic. The Fed had initially predicted that inflation would appear in early 2021 and then decline, but decision-makers – like many private sector forecasters – were wrong.

“We are not really seeing, yet, the kind of progress essentially all forecasters thought we would see now,” said Mr. Powell, at least when it comes to narrowed supply chains.

“People want to buy cars – car manufacturers can not make more cars, because there are no semiconductors,” he said, emphasizing the unusual period of the pandemic. “It never happened.”

Some Republicans, including Sen. Patrick J. Toomey of Pennsylvania, were concerned that the Fed might have gone too slow to offset price increases, in part because of a new, employment-focused policy approach Mr. Powell initiated.

“I’m concerned that the Fed’s new monetary policy framework has led to it being behind the curve,” Toomey said. But then he praised the Fed for adjusting its stance as conditions have developed and as inflation has shown signs of holding.

Investors do not seem to share the concern that the central bank will not be able to fight the situation back under control, said Subadra Rajappa, head of the US interest rate strategy at Societe Generale. She noted that inflation expectations priced into financial assets had been stable, as investors looked for about four rate hikes this year.

The markets “at least believe that they will be able to raise interest rates and curb the risk of current inflation,” she said.