Powell says Fed prepared to raise rates to tame inflation


NEW YORK (NYTIMES) – Federal Reserve chair Jerome Powell said that a rapidly healing economy no longer needed as much help from the central bank. He also emphasised that controlling inflation – which he and his colleagues can do by raising interest rates – would be a critical part of setting the stage for a long and stable expansion that boosts workers.

Mr Powell, who was testifying before members of the Senate Banking Committee on Tuesday (Jan 11) as he seeks confirmation for a second term as chair, confronts a complicated economic moment as he moves towards another four-year stint as head of the world’s most powerful central bank.

The economy is growing swiftly, but it has been buffeted by repeated virus waves and by a surge in inflation that has proved stronger and longer lasting than economists had expected. Workers are finding jobs and winning wage increases, but the rising costs of housing, petrol, food and furniture are pinching shoppers and tanking consumers’ confidence.

The Fed is charged with maintaining price stability, and its officials have recently signalled that they could raise interest rates several times this year to try to cool the economy and prevent rapidly rising prices from becoming permanent.

Mr Powell – whom President Joe Biden has nominated to a second term in his job – reiterated that commitment on Tuesday. “If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” he said. “We will use our tools to get inflation back.”

But the central bank also has a second mandate: It is supposed to guide the economy towards full employment, a situation in which people who want to work and are able to do so can find jobs. Cooling off the economy can slow hiring, so trying to foster a strong labour market and trying to set the stage for a strong labour market can require a balancing act for policymakers.

Mr Powell squared the two goals in his testimony, suggesting that keeping price gains under control will be critical for achieving a sustainably strong labour market. “High inflation is a severe threat to the achievement of maximum employment,” he said.

If rapid price gains start to become “entrenched in our economy”, the Fed might have to react starkly to choke off runaway inflation and risk touching off a recession, Mr Powell said.

To avoid a painful policy response and to instead set the stage for a strong future labour market, it is important to control inflation, he indicated. “That’s going to require us to use our tools, to the extent that they work on the demand side, while we also expect some help from the supply side.”

“Supply” is how many goods and services companies are able to produce. Supply has struggled to catch up with booming demand as the economy has reopened from the pandemic, as shipping routes are clogged, factories shut down amid virus outbreaks and employers struggle to hire to ramp up production.

The “demand side” of the economy is how much people want to buy and is the part of the economy the Fed’s policies primarily affect in the near term. Economists increasingly expect Fed officials to make three or four interest rate increases in 2022, moves that would make borrowing expensive for households and businesses and slow down spending and growth. That could, in turn, slow hiring, keep wages from growing as swiftly and hold down prices over time as people shop less.

The Fed’s rate increases would come on top of other moves the Fed is making to keep the economy from overheating: Officials are slowing down the big bond purchases they had been using to lower longer-term interest rates and stoke growth, and policymakers have signalled that they might begin to shrink their bond holdings this year.

If the Fed trims those balance sheet holdings, that will reinforce the move higher in interest rates, cooling off the economy further. “The committee hasn’t made any decisions about the timing of any of that – I think we’re going to have to be both humble and a bit nimble,” Mr Powell said.

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