Warren asked Powell if the Fed rate hikes would lower gas prices, which have hit record highs this month. “I would not believe it,” Powell said. Warren asked if food prices would fall as a result of the Fed’s war on inflation. “I would not say that, no,” Powell said. Warren expressed concern about the impact of Fed rate hikes on households and the risk of recession. “Rising interest rates will not make Vladimir Putin turn his tanks over and leave Ukraine,” Warren said, adding that they would not dismantle corporate monopolies or stop Covid-19. Warren said interest rate hikes, however, would increase the cost of borrowing for families and could lead to job losses. “Inflation is like a disease and the medicine has to be adapted to the specific problem, otherwise you could make things much worse,” Warren said. “Right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow down demand by laying off many people and making families poorer.” The Massachusetts Democrat urged Powell to be wary of further interest rate hikes. “Do you know what is worse than high inflation and low unemployment? It is high inflation with recession and millions of people out of work,” Warren said. “I hope you take this into account before you drive this economy off the cliff.” Senators on both sides of the aisle have blamed rising inflation on a number of factors, including a pandemic, rising wages and rising corporate prices. However, Powell refused to weigh any of these hot political issues. “I’m really focused on what we could do, which is shrink our balance sheet and raise interest rates and re-align supply and demand and reduce inflation to 2%,” he said.
The Fed is committed to taming 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 caused by high inflation,” Powell said in a prepared remarks during a Senate Banking Committee hearing Wednesday. “We are strongly committed to reducing inflation and we are moving fast to do so.” Powell, whose remarks echoed those he made at last week’s Fed meeting, said officials plan to continue raising interest rates to bring inflation under control. The Fed’s rate hike last week was the largest since 1994. “The US economy is very strong and in a good position to pursue a tighter monetary policy,” he said. Powell faces questions about why the Fed waited in March to raise interest rates and why it felt the need to accelerate the rate hike. In his remarks, Powell noted that monetary policy requires a recognition that the economy often evolves in “unexpected” ways. He said supply constraints were “bigger and longer lasting” than expected and that the war in Ukraine had pushed up energy prices. “Inflation has obviously picked up last year and further surprises could be in store,” Powell said. “Therefore, we need to be agile in responding to incoming data and evolving prospects.”
Recession is “definitely a chance”, but not the goal
Asked if interest rate hikes could trigger a recession, Powell said this was “definitely a possibility”, but stressed that this was not the “intention” of the Fed. Powell acknowledged, however, that the risks were growing. “Honestly, the events of recent months have made it harder for us to achieve what we want, which is 2% inflation and a strong labor market,” Powell said. The Fed chief later said he did not believe a recession would be needed to tame inflation. “I do not think we will have to cause a recession, but we believe it is absolutely necessary to restore price stability, really for the benefit of the labor market more than anything else,” he said.
Housing prices should finally start to stabilize
Powell, whose policies have helped spark a historic housing boom, expects housing price gains to fall as rising mortgage rates rise. He told lawmakers that aggressive Fed rate hikes were already slowing the housing market, reducing demand for homes. “Housing prices need to stop rising at such an extremely fast pace,” Powell said. “Since the beginning of the pandemic, we have had a very, very hot … housing market across the country. As demand for housing moderates … you will see prices stop rising.” One factor driving up housing prices has been the extremely low cost of borrowing and the purchase of hundreds of billions of dollars in mortgages by the Fed. Although he expects prices to fall, Powell warned that the Fed is not monitoring the supply of housing and said housing builders have warned of supply constraints. “This is not something the Federal Reserve can do anything about,” he said. Another complication is that rising mortgage rates – which have skyrocketed since 1987 – will hurt some people who want to buy a home. “There is some pain in that for people who pay higher mortgage rates,” Powell said. “Some people will be punished by buying mortgages, but this is ultimately what needs to happen if we want to return to price stability, in a place where people’s wages are not being eroded by inflation … The biggest pain would be if we allow this high inflation to continue. “ Additional report by Alicia Wallace
