Recession: Powell reassures Fed working to prevent decline

Powell said the pace of future rate hikes will depend on whether — and how quickly — inflation begins to fall.

WASHINGTON — Federal Reserve Chair Jerome Powell tried to reassure the public on Wednesday that the Fed will raise interest rates high and fast enough to quell inflation without tightening credit enough to slow the economy being throttled and causing a recession.

Testifying before the Senate Banking Committee, Powell faced skeptical questions from members of both parties about the Fed’s ability to tame inflation, which has become a top concern for Americans with the upcoming congressional election.

Democrats wondered if the Fed’s accelerated rate hikes could be successful in curbing inflation or just push the economy into a downturn instead. Several Republicans accused the Powell Fed of moving too slowly to start raising rates and now needing to accelerate its rate hikes and endanger the economy.

While the Fed’s primary goal now is to bring inflation down, Powell stressed he still hopes to achieve what he called a “soft landing” — a reduction in inflation and a slowdown in growth without a recession and trigger high unemployment.

“I don’t think we need to provoke a recession,” Powell said on the first of two days of the Fed’s semi-annual report hearing to Congress. “But we think it is absolutely essential that we restore price stability, really for the good of the labor market as much as anything else.”

He said the pace of future rate hikes will depend on whether – and how quickly – inflation starts falling, which the Fed will assess on a “meeting-by-meeting” basis.

The accelerating pace of the central bank’s rate hikes – it started by raising its short-term interest rate by a quarter point in March, then by half a point in May and then by three quarters of a point last week – has alarmed investors and led to sharp falls in financial markets .

Powell’s statement comes exactly a week after the Fed announced its three-quarter point hike, the largest hike in almost three decades, to a range of 1.5% to 1.75%. With inflation at a 40-year high, Fed policymakers are also forecasting an accelerated pace of rate hikes this year and next than three months ago, with the benchmark interest rate hitting 3.8% by the end of 2023. That would be its highest level in 15 years.

Concerns are growing that the Fed will cut lending enough to trigger a recession. This week, Goldman Sachs put the probability of a recession at 30% next year and 48% within the next two years.

A senior Republican on the Banking Committee, Sen. Thom Tillis of North Carolina, on Wednesday accused Powell of taking too long to raise interest rates.

“The Fed has largely locked itself into a menu of purely reactive policies,” Tillis said.

Tillis, like many Republicans, also blamed President Joe Biden’s $1.9 trillion stimulus package, approved in March 2021, for being excessively large and exacerbating inflation. Many economists agree that the extra spending helped push prices up by boosting demand, even as supply chains were derailed by COVID-related shutdowns and labor shortages drove up wages. Inflationary pressures were exacerbated by Russia’s invasion of Ukraine.

Biden is expected Wednesday to ask Congress to suspend US gas and diesel taxes to ease the sting of high fuel prices, which average nearly $5 a gallon. Many economists are skeptical that consumers will see the full benefit of a tax exemption on the 18.4 cents per gallon gas tax.

Public fears of inflation have weakened Biden’s approval ratings and increased the likelihood of November losses for the Democrats. While taking some steps to ease the burden of inflation, the President emphasized his belief that the ability to contain inflation rests primarily with the Fed.

At Wednesday’s hearing, Senator Elizabeth Warren, a Massachusetts Democrat, questioned Powell’s rate-hike plans and asked whether they would cut gas or food prices, some of the most prominent drivers of inflation. Powell conceded that they would not.

Warren said Biden’s efforts to fight inflation, such as trying to unclog supply chains and increasing the use of antitrust rules to break up monopolies, would fight higher prices more effectively.

However, Fed rate hikes can only slow demand, which will increase unemployment and weaken growth, Warren said.

“You know what’s worse than high inflation with low unemployment?” she asked. “High inflation and recession with millions unemployed.”

“I hope you consider that before you throw the US economy off a cliff,” Warren added.

At a press briefing last week, Powell suggested that either a half-point or three-quarter-point hike would be considered at the next Fed meeting in late July. Both would exceed the Fed’s hikes of a quarter point in the past, and reflect the central bank’s struggle to contain high inflation as quickly as possible.

In anticipation of more large interest rate hikes, investors have pushed up US Treasury yields sharply, which in particular makes the cost of borrowing to buy homes more expensive. With an average interest rate on 30-year fixed-rate mortgages up to about 5.8% — nearly double what it was a year ago — home sales have slowed. Credit card users and motorists are also plagued by higher borrowing costs.

In forecasts released last week, Fed officials predicted that the economy will slow sharply this year and next, but will continue to grow. But they also forecast that the unemployment rate will rise by half a percentage point by 2024, a rise economists say could lead to a recession.

Powell also said on Wednesday that the Fed still sees no sign of inflation slowing in any meaningful way, although some pricing measures, except for gas and food, have slowed somewhat over the past four months.

“That’s what we’re looking for,” he said. “We don’t see it yet.”

https://www.fox43.com/article/news/nation-world/powell-on-interest-rates-and-recession/507-9a080e76-4656-49c8-bb87-1b3fdf4453ee Recession: Powell reassures Fed working to prevent decline

Alley Einstein

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