Powell tells senators further rate hikes may be appropriate
Fed Chair Jerome Powell said inflation was “certainly high” before Vladimir Putin’s war in Ukraine, a frequent scapegoat the Biden administration uses for rate hikes.
“Would you say the war in Ukraine is the main cause of inflation in America?” sen. Bill Hagerty, R-La., Powell asked. ‘No. Inflation was rather high, especially before the war in Ukraine broke out,” the Fed chairman said.
Russia is a major exporter of fuel and essential minerals used in electronics, Ukraine is a major exporter of wheat crops. Powell said it would be reasonable to blame Europe’s high inflation on Russia’s oil and gas transition, but US inflation figures were more complicated supply and demand.
“If you look at comparable large advanced economies like ours, you see inflation rates that are quite similar to ours, higher in some cases or lower in some cases… But there are important differences in the characteristics,” he said. ‘For us, it’s more about demand. I’d say for most others it’s more about energy prices and things like that.’
The White House has often blamed the Russian war for price hikes — in April, Biden said 70 percent of the price hike could be attributed to “Putin’s price hike.”
“We’ve never seen anything like Putin’s tax on food and gas,” Biden lamented during remarks at the Port of Los Angeles earlier this month.
Powell signaled that further rate hikes are likely as Senator Elizabeth Warren warned him during a Senate hearing Wednesday morning that rate hikes would “drive this economy off a cliff.”
Powell said rate hikes will be decided at “meeting by meeting” and the central bank will need to see “conclusive evidence” that inflation is falling to halt the rises.
The consumer price index stood at 8.6 percent in May last year – the highest in more than 40 years. Last week, the Fed raised interest rates by 0.75 percent to a range of 1.5 to 1.75 percent. Throughout much of the pandemic, the Fed kept interest rates near zero, stressing that inflation would be “transient.”
The stock market has collapsed due to monetary policy tightening, but Powell said it’s because the economy has already forecast that the Fed will push interest rates even further.
“Financial conditions have already priced in additional rate hikes, but we must go ahead and implement them,” he told the Senate Banking Committee.
sen. Elizabeth Warren then tried to talk Powell off further rate hikes.
‘Will rate hikes push gas prices down?’ she asked. “I wouldn’t think so, no.”
‘Will interest rate hikes push food prices down?’ she asked. “I wouldn’t say that, no.”
You know what’s worse than high inflation with low unemployment? High inflation and a recession with millions of unemployed. I hope you consider that before you drive the US economy off a cliff,” the Massachusetts Democrat said.
So an increase in the Fed won’t bring these prices down. And why? Because rate hikes won’t get Vladimir Putin to turn his tanks around and leave Ukraine, rate hikes won’t break up monopolies, rate hikes won’t straighten the supply chain or speed up ships or stop a virus that is still causing lockdowns. †
Jerome Powell signaled that further rate hikes are likely as Senator Elizabeth Warren warned him during a Senate hearing Wednesday morning that rate hikes would “drive this economy off a cliff.”
You know what’s worse than high inflation with low unemployment? High inflation and a recession with millions of unemployed. I hope you consider that before you drive the US economy off a cliff,” Senator Elizabeth Warren said.
And when the Fed recently revised its year-end economic forecast, Powell warned there could be “further surprises” in the economy.
Making appropriate monetary policy in this uncertain environment requires an acknowledgment that the economy often brings in unexpected ways. Inflation has clearly surprised positively over the past year and there should be more surprises ahead,” he said. “So we will have to be agile in responding to incoming data and the changing outlook.”
He acknowledged that the risk of a recession is increasing: “It is certainly a possibility, and the events of recent months around the world have made it more difficult for us to achieve what we want, which is 2 percent inflation and still a strong job market.’
Fed policymakers’ projections released last week show that they expect growth to slow this year and unemployment to rise, currently at 3.6 percent.
sen. John Kennedy, R-La., then tried to get Powell to admit that cutting further federal spending would help reduce inflation. Powell repeatedly insisted that he did not want to enter congressional policy.
“Inflation is hitting my people so hard they’re coughing up bones,” the senator said. I don’t care what the inflation is in other parts of the country of the world. I’m sorry, they have inflation in the rest of the world. But because of them and misery, my people don’t feel better.’
“Now, aside from easing the regulatory burden… What if the United States Congress said, ‘Look, we have a budget that we’re going to freeze spending? We stop injecting more money into the economy. We’re going to freeze spending until Powell can gain control on the demand side. Would that help?’
“I’m excited to give you advice on what to do if we don’t get our own work done. I think maybe we’d better get our house in order and do the work you’ve told us to do,” Powell said. ‘I ask for’ [advice]Kennedy insisted.
“Look—forget Congress. Let’s assume that every governor in every state and every legislature in every state gets together tomorrow — I know it’s not likely to happen — and said we’re going to freeze our spending. Not a cent more than already budgeted. Would that help?’ the boisterous senator continued.
‘Maybe maybe. But I mean, it would take — again, I’ll give you, I’m scoring tax policy,’ Powell said.
Powell’s comments to the Senate kicked off two days of semi-annual testimony to update members of Congress on the Fed’s forecast for the economy and monetary policy. On Thursday, Powell will testify before the House Financial Services Committee.