US still far from beating inflation
Fed chair tells House despite some slowing, interest hikes possible
Jerome Powell, chair of the Federal Reserve, told House lawmakers that the United States remains a “long way” away from low and stable inflation even 15 months into the central bank’s campaign to cool the economy and wrestle down rapid price increases.
Powell testified before the House Financial Services Committee on Wednesday. He told lawmakers that the labor market remained very tight and that inflation — while it has come down notably from its peak last summer — was still too fast. In light of that, the Fed could raise interest rates even higher than their current level of just above 5 percent.
“Inflation has moderated somewhat since the middle of last year,” Powell said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”
Fed officials left interest rates unchanged last week following 10 straight increases.
But central bankers have been adamant that the decision to hit pause did not amount to a declaration of victory over inflation. Instead, moving more gradually will give policymakers time to assess how well higher rates are working to slow the economy as they try to strike a delicate balance of doing enough to cool growth without doing too much.
“Given how far we’ve come, it may make sense to move rates higher, but to do so at a more moderate pace,” Powell said in response to a lawmaker’s question, explaining that it was like moving from a highway to more local roads. “As you get closer to your destination, as you try to find that destination, you slow down even further.”
Central bankers forecast in their fresh economic projections last week that they will probably raise interest rates to around 5.6 percent this year, which would amount to two more quarter-point rate increases. Powell said
during his news conference following the decision last week that the Fed’s July 25-26 meeting will be “live,” meaning that a rate increase is possible at that gathering.
“I think that’s a pretty good guess of what will happen if the economy performs as about as expected,” Powell said Wednesday, referring to Fed officials’ forecast for two more rate moves this year.
Powell’s comments prompted a slight pullback in stock prices, although they ultimately did little to shift market expectations of future rate increases. Investors expect the Fed to raise rates once more this year, less than what most Fed policymakers anticipate.
The Fed will need to assess how much the economy is slowing, and whether that is likely to be enough to return inflation to their 2 percent goal over time, as officials decide what to do with rates. Overall growth and the housing market have cooled since 2021, but consumption and even home prices have shown recent signs of renewed strength and hiring has remained rapid.
And inflation itself has been sticky.
“Inflation has consistently surprised us, and essentially all other forecasters, by being more persistent than expected,” Powell said. “And I think we’ve come to expect that — expect it to be more persistent.”
Powell was asked about price increases globally. Many economists pointed to the United States’ large pandemic spending packages as a driver of the initial jump in inflation, but now inflation is beginning to fade in America even as it remains stubbornly very high in Europe and the United Kingdom.
“Our recovery is by far the strongest,” he said. “Everybody has very high inflation.”
He added that there’s a “common factor” that has driven price increases higher. “It’s the pandemic, and it’s everything about the pandemic: The closing of the economy, the reopening of the economy, the fiscal support, the monetary support. All the things that happened went into high inflation.”
In a separate hearing, President Biden's three nominees for the Federal Reserve’s Board of Governors pledged to fight inflation during a confirmation hearing Wednesday that drew only modest pushback from Republican members of the Senate Banking Committee.
Last month, Biden nominated Adriana Kugler, a Georgetown University economist, to serve as a Fed governor, a position that would make her the first Latina to serve on the board in the Fed's 110-year history.
He also nominated Philip Jefferson, who joined the board last year, for the spot of vice chair, which was vacated by Lael Brainard when she became a top economic adviser to Biden. Jefferson, who was a top administrator at Davidson College before being nominated by Biden, holds a doctorate in economics from the University of Virginia.
Also in May, Biden nominated Lisa Cook to serve a full 14year term on the board. Cook joined the board last year along with Jefferson, but only to serve out the final year of her predecessor’s full term.
Last year, Cook drew concerted opposition from Senate Republicans and was confirmed by the slimmest of margins, 51-50, with Vice President Kamala Harris casting a tie-breaking vote.
At the time, several Republicans asserted that Cook, a Michigan State University economist with a doctorate from the University of California Berkeley, wasn't sufficiently committed to fighting inflation.
Yet on Wednesday, even senators who challenged Cook on some of her previous statements, including J.D. Vance, a Republican from Ohio, acknowledged that she would likely be confirmed.
Vance said he believed Cook’s focus on the importance of diversity at Wall Street banks — based on comments she made in 2019, before she joined the Fed — could “distract” the central bank from its broader bank supervisory work.
On Wednesday, Cook stressed her belief that “elevated inflation is a grave threat” and noted that she has backed the Fed's 10 consecutive interest rate hikes, which are intended to slow the pace of price increases.
Democrats hold the majority on the committee and in the full Senate, making it highly likely that all three nominees will be approved. The Senate committee hasn't yet announced when it will vote on the nominations.
Senator Robert Menendez, a New Jersey Democrat who had vocally pushed the Biden administration to choose a Hispanic to serve on the Fed’s interest ratesetting committee for the first time ever, called Kugler’s selection “history in real time.”
Kugler, whose background is in international and labor economics, has been on leave from Georgetown to serve as the US representative on the board of the World Bank. During the Obama administration, she was the Labor Department’s chief economist, from September 2011 to January 2013.
“As a first-generation American and daughter of Colombian immigrants, I am fortunate to have lived the American dream after having seen poverty and adversity,” Kugler, who, like Cook, holds a doctorate from the University of California Berkeley, told the committee.