During a Senate Banking Committee hearing on Wednesday, Democratic Senator Elizabeth Warren urged Powell to proceed with cautionary rate hikes and avoid setting off a recession that could cost millions of jobs.
Warren asked Powell whether a Fed rate hike would lower gas prices, which have hit record highs this month.
“I wouldn’t think so,” said Powell.
Warren asked whether grocery prices would go down because of the Fed’s war on inflation.
“I wouldn’t say that, no,” said Powell.
Warren expressed concern about the impact of the Fed’s rate hike on households and the risk of a recession.
“The rate hike won’t make Vladimir Putin move his tanks around and leave Ukraine,” Warren said, adding that they won’t break corporate monopolies or stop Covid-19.
Warren said a hike in rates, however, would raise the cost of borrowing on households and could lead to job losses.
“Inflation is like a disease and medicine has to be tailored to the specific problem, otherwise you can make things a lot worse,” Warren said. “Right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by firing too many people and making families poorer.”
Massachusetts Democrats urged Powell to proceed with caution with further rate hikes.
“You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people are out of work,” Warren said. “I hope you consider it before you kick this economy off a cliff.”
Senators on both sides of the aisle sought to blame rising inflation on a variety of factors, including pandemic stimulus, wage hikes and rising corporate prices. However, Powell declined to weigh in on any of those politically heated issues.
“I’m really focused on what we can do, which shrinks our balance sheet and raises interest rates and brings supply and demand back into alignment and pushes inflation down to 2%,” he said. brings it back,” he said.
Fed vows to control inflation
Powell acknowledged that the high cost of living is causing financial pain on Main Street and expressed confidence that the US economy can emerge from this difficult period.
“At the Fed, we understand that difficulty is creating higher inflation,” Powell said in prepared remarks during a Senate Banking Committee hearing on Wednesday. “We are strongly committed to bringing inflation back down, and we are moving rapidly to do so.”
Powell, whose remarks were made at a Fed meeting last week, said officials plan to continue raising interest rates to keep inflation under control. The Fed’s rate hike last week was the biggest since 1994.
“The US economy is very strong and well positioned to handle tougher monetary policy,” the Fed chairman said.
Powell is faced with questions about why the Fed waited until March to raise interest rates and why it felt the need to accelerate the pace of rate hikes.
In his remarks, Powell said that monetary policy requires a recognition that economies often develop in “unforeseen” ways. He said supply constraints have been “larger and longer-lasting” than anticipated and that the war in Ukraine has driven up energy prices.
“Inflation has clearly reversed over the past year, and there could be more surprises ahead,” Powell said. “That’s why we have to be nimble in responding to incoming data and evolving approaches.”
Recession ‘definitely a possibility’, but not a target
Asked whether a rate hike could trigger a recession, Powell said that is “definitely a possibility,” but stressed that it is not the Fed’s “intent.”
Powell, however, acknowledged that the risks are increasing.
“Frankly, the events of the past few months have made it difficult for us to achieve what we want, which is 2% inflation and still a strong labor market,” Powell said.
The Fed chief later said he did not think a recession would be needed to contain inflation.
“I don’t think we will need to provoke a recession, but we do think it is absolutely necessary to restore price stability, really as much as anything else is for the benefit of the labor market,” he said.
Home prices should finally start to stabilize
Powell, whose policies have helped spark a historic housing boom, expects the rise in mortgage rates to slow home price growth.
He told lawmakers that the Fed’s aggressive interest rate hikes were already slowing the housing market, eating into demand for homes.
“Housing prices should stop rising at such rapid rates,” Powell said. “Since the start of the pandemic, we’ve had a very, very hot … housing market across the country. As demand for housing softens … you should stop increasing prices.”
One driver of the rise in home prices was extremely low borrowing costs and the Fed’s purchase of mortgage bonds worth hundreds of billions of dollars.
Although he expects prices to calm down, Powell cautioned that the Fed does not control the supply of homes and said homebuilders have warned of supply constraints. “There is nothing the Federal Reserve can do about it,” he said.
Another complication is that rising mortgage rates – which have been rising at the fastest pace since 1987 – will hurt some people who want to buy homes.
“There’s some pain involved in this for people paying higher mortgage rates,” Powell said. “Some people will be kicked out of the mortgage market, but that is what must eventually happen if we are to go back to price stability, to a place where people’s wages are not being eaten up by inflation… the biggest pain if we allow this high inflation to continue.”
Additional reporting by Alicia Wallace