Powell tells Congress that the Fed is ‘strongly committed’ to inflation, notes that a recession is a ‘possibility’

Federal Reserve Chairman Jerome Powell told congressional lawmakers on Wednesday that the central bank is determined to bring down inflation and has the ability to do so.

“At the Fed, we understand the difficulties that high inflation causes. We are deeply committed to bringing inflation down again, and we are moving quickly to do so,” the Fed chair told the Senate Banking Committee. “We have the tools we need and the resolve we will need to restore price stability on behalf of American families and businesses.”

Besides showing resolve on inflation, Powell said economic conditions are generally favorable, with a strong labor market and consistently high demand.

Jerome Powell, Chairman of the US Federal Reserve, arrives at a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, US, on Wednesday, June 22, 2022.

Ting Shen | Bloomberg | Getty Images

But Senator Elizabeth Warren, a Democrat from Massachusetts, warned Powell that continued interest rate hikes could “push this economy into a recession” without stopping inflation.

“You know what’s worse than high inflation and low unemployment is high inflation and recession with millions of people out of work, and I hope you’ll reconsider that before you push the economy off the cliff,” she said.

Although Powell said he thinks the economy is strong now, he acknowledged the possibility of a recession.

“It’s definitely a possibility,” he said. “It’s not the intended outcome at all, but it’s definitely a possibility, and frankly the events of the past few months around the world have made it difficult for us to achieve what we want, which is 2% inflation and a still strong employment market.”

He added that achieving a “soft landing” in which a policy tightening without harsh economic conditions such as a recession would be difficult.

“That’s our goal. It will be very difficult. It has been made even more difficult by the events of the last few months, with the thought here of war and commodity prices and more problems with supply chains.” Powell said. “The question of whether we will be able to achieve that will depend to some extent on factors that we have no control over.”

Powell insisted that inflation is too high and must be reduced. The May CPI rose 8.6% from a year ago, the highest level since December 1981.

“Over the coming months, we will look for convincing evidence that inflation is trending downward, consistent with inflation returning to 2%,” Powell said. “We expect continued interest rate increases to be appropriate; the pace of these changes will continue to depend on incoming data and the evolving outlook for the economy.”

Noting that the war in Ukraine and the Covid-related lockdowns in China are adding to inflation pressures, he added that the problem is not unique to the United States but affects many global economies.

Powell’s remarks are part of a congressional-mandated semi-annual report on monetary policy – better known in the markets as the Humphrey Hawkins Report and Testimony, on the act that imposed it.

This is a particularly sensitive moment for Fed policy.

During its past three meetings, the central bank has raised interest rates by a cumulative 150 basis points – 1.5 percentage points – in an effort to tackle inflation, which is running at its fastest annual pace in more than 40 years.

The 75 basis point increase at last week’s FOMC meeting was the largest single increase since 1994. Powell said he sees interest rates rising to a “moderately restrictive level”.

Republican senators lobbied Powell to clamp down on inflation, questioning whether White House policies such as regulations on the energy industry were adding to price pressures.

“Inflation is hitting my people so hard that they are coughing a bone,” said Senator John F. Kennedy, a Republican from No.

“We have a hell of a mess now,” Kennedy added. “You are the most powerful man in the United States, perhaps in the world.”

Stressing that he believes monetary tightening will be an effective tool against inflation, Powell said he believes the economy is well positioned to handle higher rates. However, Warren also told that higher rates wouldn’t do much to cut high food and gasoline costs.

Cracks have emerged in the economy this year that indicate higher rates are coming because the economy is already slowing.

Gross domestic product fell at an annualized pace of 1.5% in the first quarter and is on track to stabilize in the second quarter, according to the Atlanta Federal Reserve. Home sales are down, and there has even been some indication that the labor market is slowing down at a time when inflation-adjusted wages have fallen 3% over the past year.

Despite the economic volatility, Powell and his fellow policymakers have indicated that interest rate hikes will continue. Expectations released at the meeting last week are for the Fed’s short-term borrowing rate to rise to 3.4% by the end of this year, from the current target range of 1.5%-1.75%.

Correction: The Fed’s short-term borrowing rate is currently in the 1.5%-1.75% target range. Previous version misspelled range.

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