Powell says Fed is prepared to raise rates to tame inflation
Jerome Powell, the Federal Reserve chair, told lawmakers on Tuesday that a rapidly healing economy no longer needed as much help from the central bank and that keeping inflation in check — including by raising interest rates — would be critical for enabling a stable expansion that benefits workers.
Powell, whom President Joe Biden recently nominated for a second term as chair, is confronting a complicated economic moment as he moves toward another four-year stint as head of the world’s most powerful central bank. He provided his latest thoughts on the Fed’s challenge during his confirmation hearing before the Senate Banking Committee.
The economy is growing swiftly, but it has been buffeted by repeated waves of the coronavirus and by a surge in inflation that has proved stronger and longer lasting than economists had expected. Workers are finding jobs and winning wage increases, but the rising costs of housing, gas, food and furniture are pinching shoppers and tanking consumer confidence.
The Fed is charged with maintaining price stability, and its officials have recently signaled that they could raise interest rates several times this year to try to cool the economy and prevent rapidly rising prices from becoming permanent. Powell — who is widely expected to win confirmation — reiterated that commitment on Tuesday.
“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.
But the central bank also has a second mandate: It is supposed to guide the economy toward full employment, a situation in which people who want to work and are able to do so can find jobs. Cooling off the economy can slow hiring, so trying to foster a strong labor market and trying to set the stage for a strong labor market can require a balancing act for policymakers.
Powell squared the two goals in his testimony, suggesting that keeping price gains under control would be critical for achieving a sustainably strong labor market.
“High inflation is a severe threat to the achievement of maximum employment,” he said.
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 instead set the stage for a strong future labor market, he added that it was important to control inflation.
“If inflation does become
too persistent, if these high levels of inflation get entrenched in our economy, and in people’s thinking, then inevitably that will lead to much tighter monetary policy from us, and it could lead to a recession, and that would be bad for workers,” Powell said.
Economists increasingly expect Fed officials to make three or four interest rate increases in 2022, moves that would make borrowing expensive for households and businesses and slow down spending and growth. That could, in turn, weaken hiring, keep wages from growing as swiftly, and hold down prices over time as people shop less.
The Fed’s rate increases would come on top of other moves intended to keep the economy from overheating: Officials are slowing down the big bond purchases they had been using to lower longer-term interest rates and stoke growth, and policymakers have signaled that they might begin to shrink their bond holdings this year.
They could do that passively, allowing bonds to mature without reinvesting, or they could actively sell assets. Powell left the door open to either possibility on Tuesday. If the Fed trims those balance sheet holdings, that will reinforce the move higher in interest rates, cooling the economy further.
“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.
The Fed’s recent and decisive move toward inflation-fighting mode could be shored up by an inflation report, slated for release on Wednesday, that is expected to show the fastest growth in consumer prices since June 1982.
Powell emphasized that inflation has been high both because consumer demand for goods has been strong and because supply of goods and services have been seriously disrupted: The pandemic has shut down factories, shipping routes haven’t been able to keep up as consumers buy more imported goods, and companies have in some cases struggled to hire workers to expand production and services.
The Fed can help to cool demand with its tools, but it is also hoping that supply bounces back as companies learn to live with the new backdrop the pandemic has created, Powell said.
Keeping inflation under control is “going to require us to use our tools, to the extent that they work on the demand side, while we also expect some help from the supply side,” he said.
Still, predicting the trajectory for inflation has been a fraught task during the pandemic. The Fed had initially forecast that inflation would pop early in 2021 and then fade, but policymakers — like many private sector forecasters — got that wrong.