Powell Says Fed Looking for ‘Compelling Evidence’ that Inflation is Cooling

Jerome H. Powell, the chairman of the Federal Reserve, said the central bank may be able to bring rapid inflation down without tipping America into a painful downturn, although he warned it would be ” very difficult” to achieve this and that a recession is “certainly a possibility”.

“We are not trying to cause, and do not believe we will need to cause, a recession,” Powell said during testimony before the Senate Banking Committee on Wednesday. “But we think it’s absolutely essential to restore price stability, really for the benefit of the labor market, as much as anything else.”

Mr. Powell, who will return to Capitol Hill to testify again on Thursday, faces a tough time. Inflation as measured by the consumer price index is 8.6%, the fastest pace in more than four decades, after accelerating in May thanks to soaring gasoline and fuel prices. air fares. Although the economy remains strong and unemployment is historically low at 3.6%, rapid price increases have prompted the Fed to adjust policy at an increasingly rapid pace in an attempt to calm demand.

The Fed raised its key rate by three-quarters of a percentage point last week, the biggest move since 1994, after raising them by a quarter-point in March and half a point in May. The escalation comes as central bankers grow increasingly concerned about the scale of inflation, affecting the prices of goods and services that cover the entire economy, and as they fear that Consumer expectations for future price increases have started to rise. If people expect faster inflation, they may demand higher wages to cover costs and induce employers to charge more through rising labor costs, triggering an inflationary cycle.

“We understand the full extent of the problem and are using our tools to resolve it quite vigorously now,” Powell said during his testimony. “Price stability is really the foundation of the economy.”

The Fed’s policies to restrain demand and fight inflation are expected to hurt the economy. Central bankers themselves are predicting that unemployment will rise and growth will slow as higher rates kick in, making mortgages, credit card debt and business loans more expensive.

“I think what you’ll see is continued progress, rapid progress toward higher rates,” Powell said.

Investors on Wall Street fear the central bank could trigger a recession in its bid to bring inflation down, and economists have warned that unemployment may have to rise sharply to bring down demand enough to get inflation back under control. . Households fear for the future and consumer confidence is collapsing. Fed officials reiterated that they were trying to stabilize prices without causing a recession, although they also acknowledged that doing so would be difficult.

Achieving that goal “has been made much more difficult by the events of the past few months,” Powell said, citing supply disruptions resulting from shutdowns in China and the war in Ukraine that have pushed prices even higher. .

Still, he said the central bank must do what it can to rein in price increases, because the other risk is that the Fed fails to restore price stability and high inflation takes root in the economy. economy, hurting more than low-income people. someone else.

“I’m trying to reduce demand growth – we don’t know that demand actually has to go down, which would be a recession,” Mr Powell said. He later added that “this is very high inflation, and it’s hurting everyone, and we have to do our job and get inflation back on a downward path to 2%.”

The looming economic pain is causing trouble for many of the politicians Mr Powell testifies to ahead of this week – especially ruling Democrats. Voter approval for President Biden has sunk under the weight of inflation, which the administration routinely calls its top priority.

In fact, Mr. Biden planned to ask Congress on Wednesday to temporarily suspend the federal gas tax, an effort to slow soaring fuel prices. Passing such a measure could prove difficult, and economists have generally dismissed the policy as having limited impact, much like most inflation-fighting measures the administration may have put in place.

The Fed, which is independent of politics, is the nation’s main response to rapidly rising prices. Its policies may be painful, but they are insulated from election cycles so central bankers can make tough short-term decisions to put the economy on a more stable long-term path.

But central bank policies are not perfectly suited at this time. Its rates are slowing demand, but many of the factors pushing inflation higher today are supply-side: China’s attempts to contain the coronavirus have slowed factory output, gas costs and of food surged after Russia invaded Ukraine and persistent shipping issues that began amid the pandemic have kept some parts and goods out of stock.

“Inflation has obviously surprised on the upside over the past year, and more surprises may be in store,” Powell said on Wednesday.

While the White House has emphasized the central role of the Fed in fighting inflation, some Democratic senators – including Elizabeth Warren of Massachusetts – have questioned whether hurting the economy is the right solution to rapid oil price increases. ‘today. Some have called for a more personalized approach, even as more focused White House efforts struggle to gain traction.

Mr Powell acknowledged that the rate moves would not lower food or fuel prices, but they affected the economy by making it more expensive to spend with borrowed money, driving down stock prices and other assets, and by global currency adjustments.

“The idea is to moderate demand so it can be in better balance with supply,” Mr Powell said.

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