The US economy can withstand austerity measures from the Fed, Omicron rise, says Powell

January 11 (Reuters) – Federal Reserve Chairman Jerome Powell, in a congressional hearing pointing to his probable confirmation for a second term as head of the US Federal Reserve, said on Tuesday that the economy would cope with the current COVID-19 rise by only ” short-term “effects and was ready for the start of a tighter monetary policy.

Powell was openly supported by Republicans and Democrats on the Senate Banking Committee in a session that largely focused on how the Fed planned to meet inflation for decades, why the central bank misdiagnosed the rise in price increases, and what stricter monetary policy. would mean for job growth.

The Fed chief said that the central bank was determined to ensure that high inflation was not “anchored”, and that far from reducing job growth, a turnaround in higher key interest rates and a run-off of the asset portfolio were necessary to keep the current economic expansion going. .

If prices continue to rise, the Fed may be forced to push through a sharper rate hike this year than the three-quarter percentage point increases politicians are currently expecting, and risk a return to recession.

“Inflation goes far beyond the target. The economy no longer needs or wants the very accommodating policies we have in place,” Powell said in his testimony.

Yet with the Fed’s overnight reference rate close to zero and nearly $ 9 trillion in book assets, “there is a long way to go” to something close to restrictive policies, Powell said. In the meantime, Fed actions “should not have a negative effect on the labor market,” he added.

“You have to focus on gaining control over inflation because you are not going to have maximum employment without price stability.”

‘A little quick’

The hearing had the potential to be combative. Some Democrats have announced their opposition to Powell’s nomination, who was promoted to the top Fed job by former President Donald Trump, and criticized his oversight of Wall Street; a stock trading scandal and the dismissal of several top officials have tarnished the Fed’s image; and some Republicans have argued that he allows the central bank to be biased in issues such as climate change and economic inequality.

But it was largely unshakable and focused on key economic issues, and Powell made his full comments yet on how the unique increase in coronavirus cases has affected his prospects.

Despite disruptions in schooling, travel, and even some core services, “what we see is an economy working through these waves of COVID,” Powell said.

The dominant theme, if any, was centered on inflation, the Fed’s misdiagnosis of it last year as “temporary”, and on the central bank’s plans to get ahead of it now that it is well above the 2% target.

Powell said he still felt that even if the level of price increases required the Fed to act, some relief would come from monetary policy when global supply chains begin to catch up. By incorrectly expecting the adjustment to happen quickly, Powell said, the reason the Fed first rejected rising inflation last year is likely to decline without a Fed response, only to see prices continue to rise to levels not seen since the inflation scare of the 1970s and 1980s.

He said he now believes inflation will decline by the middle of this year, but that the Fed was ready to tighten borrowing costs as needed to make sure it does.

“We need to be humble, but a little nimble,” Powell said as he decided when and how quickly we should raise interest rates and change the Fed’s assets, which have increased as a result of its pandemic-related support for the economy. .

Powell gave no new indication of the timing of the rate hike, which many analysts expect will begin in March. He also said that no decision had been made on when to reduce the size of the central bank’s asset portfolio, but that it would probably happen “sooner and faster” than it did after the recession of 2007-2009, when the Fed expected approx. years after an initial rate hike to shrink the balance sheet.

US stocks, which started the year on a weak note as the Omicron variant led to an increase in COVID-19 cases and investors repositioned for a Fed more intention to curb inflation, rose under Powell’s testimony. Interest rates on shorter-term government securities fell from pandemic peaks earlier in the day.

TASTE VURDER

The hearing was a first step in Powell’s expected confirmation of a new four-year term. Lael Brainard, currently the Fed governor, will be questioned by the same panel on Thursday for promotion to a four-year term as Fed deputy chairman.

At the start of Tuesday’s session, Democratic Senator Sherrod Brown, panel leader, and Senator Pat Toomey, its senior Republicans, supported Powell’s leadership of the Fed’s response to the pandemic, even as they raised questions about the next steps.

“I think you have shown leadership” to lead the Fed through debates on inflation, regulation and an ethics scandal over stock trading by senior officials, Brown said.

Toomey said he was concerned that the Fed’s robust response to the pandemic could now stimulate inflation and “become the new normal”, and reiterated his criticism of the central bank which delved into what he sees as political issues such as climate change and inequality.

In December, the Fed decided to close its purchases of government bonds and mortgage-backed securities – a legacy of the nearly two-year battle against the economic downturn in the pandemic – by March, signaling that it could raise interest rates three times this year.

The financial markets are pricing a slightly more aggressive pace with four interest rate increases this year.

Reporting by Howard Schneider Editing by Chris Reese and Paul Simao

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