Fed fight against inflation ‘unconditional’, says Powell By Reuters

Fed fight against inflation 'unconditional', says Powell By Reuters


© Reuters. Fed Chairman Jerome Powell testifies before lawmakers 6/23/2022 REUTERS/Mary F. Calvert

By Lindsay Dunsmuir and Ann Saphir

(Reuters) – The Federal Reserve’s commitment to rein in the highest inflation in 40 years is “unconditional”, U.S. Federal Reserve Chairman Jerome Powell told lawmakers on Thursday, even as he acknowledged that significantly higher interest rates could increase unemployment.

“We really need to restore price stability…because without that we can’t have a sustained period of full employment where the benefits are widespread,” Powell told the House of Representatives Financial Services Committee. United States.

“It’s something we have to do, we have to do it.”

Powell’s testimony marked the second straight day of questioning in the US Congress over the central bank’s efforts to rein in inflation, which the Fed’s preferred measure is more than three times the 2% target. of the central bank.

Rapidly rising prices for fuel, food, housing and just about everything else are undermining Americans’ wages, hurting businesses and stoking fears of an economic slowdown and a sharp rise in unemployment.

On Wednesday, Powell told the Senate Banking Committee that the central bank was not trying to trigger a recession, but it was “certainly a possibility” amid global events beyond the Fed’s control, particularly the impact of the war in Ukraine and Covid. -19, which makes it more difficult to control price pressures without inducing a slowdown.

Pricing pressures have been building for months and have forced the Fed to tighten financial conditions in an effort to reduce demand, while expecting some supply chain issues to begin to resolve later this year.

The Fed last week raised its benchmark interest rate by 0.75 percentage points, the highest since 1994, to a range of 1.50% to 1.75%, and interest rates reported could reach 3.4% until the end of this year.

At a June 15 press conference, Powell said the central bank is likely to raise rates by 0.50 or 0.75 percentage points at its next meeting in July.

Since then, other Fed officials have echoed that defense to quickly put borrowing costs into mildly restrictive territory.

Others have gone further.

Fed Chief Michelle Bowman said on Thursday she favored a 0.75 percentage point hike in July, followed by 0.50 point hikes in “future” meetings, a more path of rate hikes. aggressively than most other authorities currently do.

Economists polled by Reuters this week predicted the Fed would make another 0.75 percentage point hike in interest rates next month, followed by a 0.50 point hike in September, with no moderation for moves by 0.25 points by the end of the month minus November.

NO PRECISION TOOLS

We are already seeing the first signs of a slowdown in a labor market that is still very buoyant. Data released on Thursday showed new jobless claims, which fell to over 53 in March, fell last week.

Questioned by members of the U.S. House of Representatives committee on Thursday, Powell said there was a risk that the Fed’s actions could lead to higher unemployment. The US unemployment rate was 3.6% in May.

“We don’t have precision tools,” Powell said, “so there’s a risk that unemployment will rise from an all-time low. A labor market with 4.1% or 4.3 % unemployment is still a very strong labor market.”

At the same time, however, Powell said a recession is not inevitable, as former Fed colleagues have asserted. Powell expects economic growth to pick up in the second half of the year after a rocky start to 2022.

During the three-hour session, Powell was asked about whether to raise the Fed’s 2% inflation target, a solution proposed in some circles as a way to give the central bank more leeway. maneuver to stimulate employment. Powell was adamant: “It’s just not something we would do,” he said.

He also ruled out the possibility of lowering interest rates in a hypothetical situation where unemployment is high and inflation remains high. “We can’t fail in this: we really need to bring inflation down to 2%,” he said.

Powell was also asked about the $9 trillion balance sheet the Fed has amassed during the pandemic as the central bank seeks to ease financial conditions, which it began easing this month. The Fed intends to take it “roughly into the $2.5 trillion range, which is $3 trillion less than it is now,” Powell said.

(By Ann Saphir, Dan Burns and Lindsay Dunsmuir)

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