WASHINGTON – Federal Reserve Chairman Jerome Powell warned that high inflation could make it harder to restore the job market.
As America’s households come under pressure from higher costs for groceries, gasoline, rent, cars, and many other items, the Fed is under pressure to contain inflation by raising interest rates to curb borrowing and spending. At the same time, the economy has recovered to such an extent that the Fed’s ultra-low interest rate policy is no longer necessary.
“If we need to keep raising rates over time, we will,” Powell said during a hearing for the Senate Banking Committee considering his nomination for a second term of four years.
The great challenge Powell faces, if he is re-elected as expected, was underscored by the questions he faced Tuesday from both Democratic and Republican senators. They urged him to raise interest rates to lower inflation, but without increasing the cost of borrowing so much that the economy plunged into recession.
Fed officials have forecast three hikes in their short-term policy rate this year, though some economists say they expect up to four hikes in 2022.
Powell’s nomination is expected to be approved by the committee sometime in the coming weeks and then ratified by the entire Senate with bipartisan support. At Tuesday’s hearing, he received mostly supportive comments from senators from both parties. Powell, a Republican first appointed to the chair by President Donald Trump, has also been blamed by many Democrats for adhering to ultra-low rates for the past 18 months to encourage quick hires.
In his testimony, Powell rejected proposals by some Democratic senators that wage increases would weaken employee recruitment and potentially leave many people, especially low-income and black Americans, unemployed. Fed rate hikes typically drive up borrowing costs on many consumer and corporate loans and hold back the economy.
Powell argued, however, that rising inflation, if it continues, will also pose a threat to the Fed’s goal of getting almost anyone looking for a job back into work. Low-income families have been particularly hard hit by the surge in inflation, which has undermined the wage increases many have received.
“High inflation is a serious threat to achieving maximum employment,” he said.
The economy, added the Fed chairman, needs to grow over a sustained period in order to get as many Americans as possible back to work. Controlling inflation before it settles is necessary to keep the economy growing, he said. If prices continue to rise, the Fed could be forced to step on the brakes much harder by hike rates sharply, threatening hiring and growth.
Powell received praise from Ohio Democratic Senator Sherrod Brown, chairman of the committee, and Pennsylvania Senator Pat Toomey, the senior Republican on the panel.
“The president puts results above partisanship and nominates a Federal Reserve chairman for the other political party,” Brown said. “As chairman, he and President Biden helped us make historic economic progress.”
“There is widespread bipartisan support for the re-nomination of Chairman Powell,” added Toomey.
Still, Toomey also criticized some of the Fed’s 12 regional banks for holding events on climate change and “so-called racial justice,” which, according to Toomey, went well beyond the Fed’s mandate. He cited an event organized by the Federal Reserve Bank of Boston at which attendees called for the police to be defused.
“The troubling politicization of the Fed is jeopardizing its independence and effectiveness,” Toomey said.
And Senator Richard Shelby, an Alabama Republican, criticized Powell for the central bank’s initial characterization of price spikes, which began this spring, as “temporary.”
“I worry if the Fed missed the boat earlier on fighting inflation, so are many of us,” said Shelby. “As a result, the Fed has lost a lot of credibility under your leadership.”
Inflation has soared to its highest level in four decades, and on Wednesday the government is expected to announce that consumer prices have risen 7.1% in the past 12 months, the largest of its kind since 1982.
Powell said the Fed was wrongly expecting supply chain bottlenecks, which are driving up prices for goods like cars, appliances and furniture, not to last anywhere near as long as they have been. Once cleared up, prices for things like used cars, which have skyrocketed in the past year, would go down again, he said.
But for now, those supply chain issues persist, and while there are signs of them loosening, Powell said progress is limited. He found that many cargo ships were anchored outside the port of Los Angeles and Long Beach, the largest in the country, waiting to be unloaded.
The number of people working or looking for work also remains well below pre-pandemic levels, Powell noted. Millions of Americans have retired early or are avoiding jobs for fear of the coronavirus. The Fed expected that more of these people would return to work than previously.
The smaller workforce has forced companies to offer much higher wages in order to attract and retain employees. Powell said this isn’t primarily why prices are high now, but it “may be a problem for inflation in the future”.
Economists and former Fed officials have raised concerns that the Fed is lagging the curve on inflation. Last Friday’s job report for December, which showed a sharp drop in the unemployment rate to a healthy 3.9% and an unexpected wage increase, helped fuel those concerns. While workers benefit from lower unemployment and higher wages, these trends can potentially fuel rising prices by encouraging more spending.
At the last Fed meeting in December, Powell said the central bank was accelerating its credit tightening efforts with the aim of containing inflation. The Fed will stop buying billions in bonds in March before it hits its previously announced target in June. These bond purchases should encourage more borrowing and spending by lowering longer-term interest rates.
And Fed officials’ expectation to hike short-term rates three times this year marks a marked shift from September, when they were divided about doing so even once.
The spate of new Omicron infections will not slow the Fed’s transition to policies that are better suited to normalizing the economy, Powell said at the hearing, as it does not seem to weigh on the economy so far.
“It really is time we moved from these emergency pandemic settings to more normal levels,” he added. “It’s a long way to go from where we are to normal.”
