Federal Reserve Chairman Jerome Powell said the central bank was determined to regain control of inflation, although he acknowledged the Fed had little power to treat its most visible symptoms at the pump. petrol or the supermarket.
Powell addressed the Senate Banking Committee on Wednesday, a week after the Fed ordered the biggest interest rate hike since 1994. The central bank is under increasing pressure to fight inflation, which has reached a four-decade high of 8.6% in May.
“We need to bring inflation down to 2%,” Powell told lawmakers. “We are using our tools to do that. And the public should believe that we will bring inflation down to 2% over time.”
Sen. Elizabeth Warren, D-Mass., has warned that a sharp rise in borrowing costs could lead to increased layoffs, while doing nothing to unravel the supply shocks that have driven up the price of oil. gasoline and groceries.
“You know what’s worse than high inflation and low unemployment?” said Warren. “It’s high inflation and a recession with millions out of work. I hope you reconsider that before you knock this economy off a cliff.”
Powell stressed that the economy was well positioned to withstand higher interest rates, although he acknowledged that the war in Ukraine and ongoing supply chain problems increased the risk of an economic slowdown. .
“It’s definitely a possibility,” Powell said. “It’s not our expected outcome at all, but it’s certainly a possibility.”
“We are not trying to cause – and do not think we will need to cause – a recession,” he added. “But we think it’s absolutely essential to restore price stability, really for the benefit of the labor market as much as anything else.”
A growing number of forecasters are now seeing storm clouds on the horizon. Economists interviewed by the the wall street journal put the odds of a recession over the next 12 months at 44%, down from 28% in April.
Powell argued that forecasting recessions is notoriously difficult, but added that he does not see the risk as particularly high.
“The US economy for now is strong. Spending is strong. Consumers are in good shape. Businesses are in good shape,” Powell said. “Monetary policy is notoriously a blunt tool. And there is a risk that weaker outcomes are certainly possible. But that is not our intention.”
After keeping interest rates near zero for the first two years of the pandemic, the Fed is now taking aggressive action to raise borrowing costs in an effort to reduce demand. The Fed’s benchmark rate jumped to 1.6%, and more rate hikes are expected in the coming months.
Mortgage rates have risen sharply in anticipation of the Fed’s actions, and this is starting to weigh on both home sales and home construction.
Some Republicans on the committee blamed the Fed for waiting too long to quell inflation and blamed the $1.9 trillion relief bill passed by congressional Democrats last year for fueling consumer demand.
“The Federal Reserve and this administration have let the American people down by ignoring these warnings a year ago and not acting sooner to respond to them,” said Sen. Richard Shelby, R-Ala.
Powell and other officials admitted that they initially misjudged both the severity and the resilience of inflation. But the Fed Chairman insists he is determined to get prices under control.
“We have the tools, the determination and hopefully the judgment to accomplish this task,” Powell said.
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