WASHINGTON–Federal Reserve Chairman Jerome Powell has sent the clearest signal yet that rates will be on the rise this year, while also defending himself before Congress over how the Fed missed the mark so badly on inflation.
Federal Reserve Chairman Jay Powell.
Testifying before the Senate Banking Committee as he seeks confirmation for a second term as chair, Powell emphasized that controlling inflation, which is best accomplished by raising interest rates, will be a focus as the Fed seeks to set the stage for a sustained expansion of the economy.
“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Powell said. “We will use our tools to get inflation back.”
He acknowledged the Fed’s earlier forecasts underplayed inflation.
“We and other forecasters, we believed based on our analysis and discussions with people in industry that the supply side issues would be alleviated more quickly than now appears to be the case,” Powell said. “Substantially more quickly.”
He said the Fed had expected a “much more significant return to the workforce than what has actually taken place.
“While that is not what is causing current inflation,” Powell said, “labor supply can be an issue going forward for inflation, probably more than the supply side issues.”
Second Mandate
Powell said the Federal Reserve will also continue to focus on its second mandate, which is to support full employment, so it must balance rate increases against overly cooling the economy to the point it hurts jobs and hiring.
“High inflation is a severe threat to the achievement of maximum employment,” Powell told the Senate.
Powell and other members of the Fed have backed away from their earlier statements that inflation is “transitory” and will pass, and he acknowledged rising prices have lasted longer than many had expected.
If rapid price gains start to become “entrenched in our economy,” the Fed might have to react starkly to choke off runaway inflation and risk touching off a recession, Powell said. To avoid a painful policy response and to instead set the stage for a strong future labor market, it is important to control inflation, he indicated.
‘Humble and Nimble’
Prior to testifying, Powell had already indicated the Fed plans to cut back on the amount of federal debt it has been buying and to taper its balance sheet holdings, which is also designed to push rates higher.
“The committee hasn’t made any decisions about the timing of any of that — I think we’re going to have to be both humble and a bit nimble,” Powell said, adding that while all members of the Fed’s policy-setting committee expect to raise interest rates this year, how many increases the central bank actually makes will depend on how the economy evolves at an uncertain moment.
As CUToday.info has reported, most analysts are predicting the Fed will move three times in 2022—in quarter-point increments—to raise rates, but Goldman Sachs’ economists have recently said they expect four such increases.
How fast the Fed will act could be affected by the release today of an inflation report by the federal government.
Some Concerns Expressed
Senate Republicans, including Sen. Patrick J. Toomey of Pennsylvania, expressed concerns the Fed might have moved too slowly to counteract price gains thanks in part to a new, employment-focused policy approach that Powell has overseen, noted the New York Times.
“I worry that the Fed’s new monetary policy framework has caused it to be behind the curve,” Toomey said, before praising the Fed for adjusting its stance as conditions have evolved and inflation has not dissipated as quickly as many had expected.
Powell’s statement to the committee can be found here.
Federal Reserve Chairman Jay Powell.
Testifying before the Senate Banking Committee as he seeks confirmation for a second term as chair, Powell emphasized that controlling inflation, which is best accomplished by raising interest rates, will be a focus as the Fed seeks to set the stage for a sustained expansion of the economy.
“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Powell said. “We will use our tools to get inflation back.”
He acknowledged the Fed’s earlier forecasts underplayed inflation.
“We and other forecasters, we believed based on our analysis and discussions with people in industry that the supply side issues would be alleviated more quickly than now appears to be the case,” Powell said. “Substantially more quickly.”
He said the Fed had expected a “much more significant return to the workforce than what has actually taken place.
“While that is not what is causing current inflation,” Powell said, “labor supply can be an issue going forward for inflation, probably more than the supply side issues.”
Second Mandate
Powell said the Federal Reserve will also continue to focus on its second mandate, which is to support full employment, so it must balance rate increases against overly cooling the economy to the point it hurts jobs and hiring.
“High inflation is a severe threat to the achievement of maximum employment,” Powell told the Senate.
Powell and other members of the Fed have backed away from their earlier statements that inflation is “transitory” and will pass, and he acknowledged rising prices have lasted longer than many had expected.
If rapid price gains start to become “entrenched in our economy,” the Fed might have to react starkly to choke off runaway inflation and risk touching off a recession, Powell said. To avoid a painful policy response and to instead set the stage for a strong future labor market, it is important to control inflation, he indicated.
‘Humble and Nimble’
Prior to testifying, Powell had already indicated the Fed plans to cut back on the amount of federal debt it has been buying and to taper its balance sheet holdings, which is also designed to push rates higher.
“The committee hasn’t made any decisions about the timing of any of that — I think we’re going to have to be both humble and a bit nimble,” Powell said, adding that while all members of the Fed’s policy-setting committee expect to raise interest rates this year, how many increases the central bank actually makes will depend on how the economy evolves at an uncertain moment.
As CUToday.info has reported, most analysts are predicting the Fed will move three times in 2022—in quarter-point increments—to raise rates, but Goldman Sachs’ economists have recently said they expect four such increases.
How fast the Fed will act could be affected by the release today of an inflation report by the federal government.
Some Concerns Expressed
Senate Republicans, including Sen. Patrick J. Toomey of Pennsylvania, expressed concerns the Fed might have moved too slowly to counteract price gains thanks in part to a new, employment-focused policy approach that Powell has overseen, noted the New York Times.
“I worry that the Fed’s new monetary policy framework has caused it to be behind the curve,” Toomey said, before praising the Fed for adjusting its stance as conditions have evolved and inflation has not dissipated as quickly as many had expected.
Powell’s statement to the committee can be found here.
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