During a Senate banking committee hearing Wednesday, Democrat Sen. Elizabeth Warren called on Powell to continue raising interest rates cautiously and avoid causing a recession that has cost millions of jobs.
Warren asked Powell if the Fed’s interest rate hikes would cut gas prices, which reached record highs this month.
“I wouldn’t think so,” Powell said.
Warren asked if food prices would fall because of the Fed’s war on inflation.
“I wouldn’t say so, no,” Powell said.
Warren expressed concern about the impact of the Fed’s rising interest rates on families and the risk of a recession.
“Rising prices will not make Vladimir Putin turn his tanks around and leave Ukraine,” Warren said, adding that they would not break corporate monopolies or stop Covid-19.
However, Warren said raising interest rates would increase the cost of lending to families and could lead to job losses.
“Inflation is like a disease and the drug must be tailored to the specific problem, otherwise you can make things much worse,” Warren said. “Currently, the Fed has no control over the main drivers of rising prices, but the Fed may slow demand by laying off many people and making families poorer.”
The Massachusetts Democrat called on Powell to proceed cautiously with further interest rate hikes.
“Do you know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work,” Warren said. “I hope you will consider this before driving this economy off the cliff.”
Senators on both sides of the trail have sought to blame rising inflation for a variety of factors, including pandemic stimuli, wage growth and rising corporate prices. However, Powell refused to weigh any of these politically heated issues.
“I’m really focused on what we can do, namely shrink our balance sheets and raise interest rates and bring supply and demand back in line and bring inflation back to 2%,” he said.
The Fed promises to reduce high inflation
Powell acknowledged that the high cost of living was causing financial pain on Main Street and expressed confidence that the US economy could overcome this difficult period.
“At the Fed, we understand the difficulties that high inflation causes,” Powell said in prepared notes during a Senate banking committee hearing on Wednesday. “We are strongly committed to reducing inflation and we are moving fast towards that.”
Powell, whose remarks echoed those he made last week at the Fed meeting, said officials plan to continue raising interest rates to keep inflation under control. The Fed’s interest rate hike last week was the largest since 1994.
“The US economy is very strong and well-positioned to deal with tighter monetary policy,” he said.
Powell is wondering why the Fed waited until March to raise interest rates and why he felt the need to accelerate the pace of interest rates.
In his speech, Powell noted that monetary policy requires recognition that the economy often develops in “unexpected” ways. He said supply restrictions were “bigger and longer lasting” than expected, and the war in Ukraine has led to rising energy prices.
“Inflation has obviously come up in the last year and new surprises can be expected,” Powell said. “Therefore, we need to be agile in responding to input and changing perspectives.”
The recession is “certainly an opportunity”, but not a goal
Asked if raising interest rates could cause a decline, Powell said it was “certainly an opportunity”, but stressed that it was not “the Fed’s intention”.
However, Powell acknowledged that the risks were increasing.
“Honestly, the events of the last few months have made it difficult for us to achieve what we want, which is 2% inflation and a still strong labor market,” Powell said.
The Fed chief later said he did not think a recession would be needed to curb inflation.
“I don’t think we will have to provoke a recession, but we think it is absolutely necessary to restore price stability, really for the benefit of the labor market, and for everything else,” he said.
Housing prices must finally begin to stabilize
Powell, whose policies have helped spark a historic housing boom, expects rising house prices to fall due to rising mortgage rates.
He told lawmakers that the Fed’s aggressive increase in interest rates is already slowing the housing market, eroding demand for housing.
“Home prices need to stop rising at such a remarkably fast pace,” Powell said. “Since the beginning of the pandemic, we have had a very, very hot … housing market across the country. As the demand for housing is moderate … you have to see that prices stop rising.
One of the drivers of rising house prices was the extremely low cost of borrowing and the Fed’s purchase of hundreds of billions of dollars in mortgage bonds.
Although he expects prices to cool, Powell warned that the Fed did not control the supply of housing and said that home builders had warned of supply restrictions. “This is not something the Federal Reserve can do anything about,” he said.
Another complication is that rising mortgage rates – which have been growing at the fastest pace since 1987 – will hurt some people who want to buy a home.
“There’s some pain in that for people who pay higher interest rates on mortgages,” Powell said. “Some people will be removed from the mortgage market, but this must happen in the end if we want to return to price stability, to a place where people’s wages are not eaten up by inflation … The biggest pain it would be if we allow this high inflation to continue. “
Additional reports by Alicia Wallace
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