© Reuters. Jerome Powell, Fed Chair, gives testimony to lawmakers 6/23/2022 REUTERS/Mary F. Calvert
By Lindsay Dunsmuir and Ann Saphir
(Reuters) – The Federal Reserve’s commitment to curbing the highest inflation in 40 years is “unconditional,” U.S. Federal Reserve Chair Jerome Powell told lawmakers on Thursday, even as he acknowledged that interest rates sharply higher prices can raise unemployment.
“We really need to restore price stability … because without that we won’t be able to have a sustained period of full employment where the benefits are widespread,” Powell told the US House of Representatives Financial Services Committee.
“It’s something we need to do, we must do.”
Powell’s testimony marked the second straight day of interrogation in the US Congress over the central bank’s effort to rein in inflation, which, according to the Fed’s preferred measure, is more than three times the central bank’s 2% target.
Rapidly rising prices for fuel, food, housing and just about everything else are undermining Americans’ wages, hurting businesses and fueling 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 that it is “certainly a possibility” amid global events beyond the Fed’s control, specifically the impact of the war in Ukraine. and the Covid-19 pandemic, which makes it more difficult to control price pressures without inducing a slowdown.
Price pressures have mounted for months and have forced the Fed to tighten financial conditions in an attempt to dampen demand, while expecting some supply chain issues to begin to resolve later this year.
Last week, the Fed raised its benchmark interest rate by 0.75 percentage point, the highest since 1994, to a range of 1.50% to 1.75%, and signaled interest rates could rise to 3.4%. until the end of this year.
In a June 15 news conference, Powell had said the central bank would likely need 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 of putting borrowing costs into slightly restrictive territory quickly.
Others went further.
Fed chief Michelle Bowman said on Thursday that she advocates a 0.75 percentage point increase in July, followed by 0.50 point hikes at “next” meetings, a more aggressive trajectory of rate hikes than the 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 0.25 point moves by the end of the month. minus november.
NO PRECISION TOOLS
There are already some preliminary signs of a slowdown in a still very buoyant labor market. Data released on Thursday showed that new claims for unemployment benefits, which fell to more than 53-year lows in March, fell last week.
Questioned by members of the US House of Representatives committee on Thursday, Powell said there was a risk that the Fed’s actions would lead to a rise in unemployment. The US unemployment rate was at 3.6% in May.
“We don’t have precision tools,” Powell said, “so there is a risk that unemployment will rise from what is a historically low level. A job market with 4.1% or 4.3% unemployment is still It’s a very strong job market.”
At the same time, however, Powell said a recession is not inevitable, as former Fed colleagues have claimed. Powell expects economic growth to pick up in the second half of the year after a rough start to 2022.
Over the course of the three-hour session, Powell was asked whether to raise the Fed’s 2% inflation target, a solution proposed in some circles as a way to give the central bank more room to boost employment. Powell was adamant: “This is 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 that: we really have to bring inflation down to 2%,” he said.
Powell was also asked about the $9 trillion balance sheet the Fed amassed during the pandemic as the central bank sought to ease financial conditions, which it began to reduce this month. The Fed intends to bring it “approximately into the $2.5 trillion range, or $3 trillion less than it is now,” Powell said.
(By Ann Saphir, Dan Burns and Lindsay Dunsmuir)