Powell: Fed will decide on rate hikes each meeting
WASHINGTON – Federal Reserve Chair Jerome Powell on Wednesday underscored the Fed’s determination to raise interest rates high enough to slow inflation, a commitment that has fanned concerns that the central bank’s fight against surging prices could tip the economy into recession.
Powell said the pace of future rate hikes will depend on whether – and how quickly – inflation starts to decline, something the Fed will assess on a “meeting by meeting” basis.
Its decision-making will be based on “the incoming data and the evolving outlook for the economy,” Powell said in prepared testimony to the Senate Banking Committee, which he is addressing as part of the Fed’s semiannual policy report to Congress.
Powell’s testimony comes a week after the Fed raised its benchmark interest rate by three quarters of a percentage point, its biggest hike in nearly three decades, to a range of 1.5% to 1.75%. With inflation worsening, the Fed’s policymakers also forecast a more accelerated pace of rate hikes this year and next than they had predicted three months ago, with its key rate reaching 3.8% by the end of 2023. That would be its highest level in 15 years.
Concerns are growing that with inflation at a four-decade high, the Fed will end up tightening credit so much as to cause a recession. This week, Goldman Sachs estimated the likelihood of a recession at 30% over the next year and at 48% over the next two years.
A senior Republican on the Banking Committee, Sen. Thom Tillis of North Carolina, on Wednesday accused Powell of having taken too long to raise rates, saying the Fed’s hikes “are long overdue” and its benchmark shortterm rate should go much higher.
“The Fed has largely boxed itself into a menu of purely reactive policy measures,” Tillis said.
At a news conference last week, Powell suggested that a rate hike of either one-half or three-quarters of a point will be considered at the Fed’s next meeting in late July. Either one would exceed the quarter-point Fed hikes that have been typical in the past, and they reflect the central bank’s struggle to curb high inflation as quickly as possible.
Anticipating additional large rate hikes ahead, investors have sent Treasury yields sharply higher, making borrowing costs for home purchases, in particular, more expensive. With the average 30-year fixed mortgage rate up to roughly 5.8% – nearly twice the rate just a year ago – home sales have weakened. Credit card users and auto are also being hit with higher borrowing costs.
Fed officials hope that such changes will help achieve their goals of cooling demand enough to slow the economy and moderate price increases. In his testimony, Powell said the higher interest rates “should continue to temper growth and help bring demand into better balance with supply.”