Fed Chair Powell says rate hikes and policy tightening will be needed to control inflation

U.S. Federal Reserve Chairman Jerome Powell speaks during a renomination hearing for the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, U.S., January 11, 2022.

Graeme Jennings | Reuters

Chairman of the Federal Reserve Jerome PowellWith a seemingly clear path to a second Fed term, the U.S. economy was declared healthy enough on Tuesday to tighten monetary policy.

as part of him confirmation hearing Before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Powell said he expected a series of rate hikes this year, along with the extraordinary help of other reductions The Fed has been delivering during the pandemic.

“As the year progresses…if things go as expected, we will normalize policy, which means we’ll end asset purchases in March, which means we’ll be raising rates this year,” he said. Tell the committee members. “Maybe at some point later this year, we’ll start allowing balance sheets to drain, and that’s the path to policy normalization.”

He made the above remarks during this period 2.5 hour course That includes both praise for the Fed’s handling of the economy and criticism for what central bankers see as a moral lapse. Some Republican senators also expressed concern about whether the Fed strayed too far from its stated goals of price stability, full employment and bank regulation.

Ultimately, though, Powell appears to be heading toward a successful confirmation of the full Senate. Committee Chair Sherrod Brown, Ohio Democrats, and Pennsylvania Sen. Patrick Toomey, top Republicans, have all said they plan to support President Joe Biden’s nomination. Sen. Elizabeth Warren, Democrat of Massachusetts, said she would oppose the nomination, After calling Powell ‘dangerous’ at last year’s hearing.

Many of the issues on both sides of the aisle focus on inflation, which is Running at a near 40-year high. After declaring the surge for much of 2021 to be “transitory,” the Fed has shifted focus to inflation and is Three or four rate hikes expected This year, it has increased by a quarter of a percentage point.

Higher interest rates keep inflation in check by slowing the flow of money, which has been flowing rapidly through the economy as the Federal Reserve and Congress jointly provide more than $10 trillion worth of stimulus.

“If we see inflation at high levels for longer than expected, then if we have to raise interest rates further over time, we will,” Powell said. “We will use our tools to restore inflation.”

Support jobs, fight inflation

In addition to raising interest rates, the Fed also Reduce monthly bond purchases, its balance sheet has grown by more than $4.5 trillion since the early days of the pandemic. Officials also said they would begin shrinking their balance sheets later this year, likely primarily by allowing a certain level of monthly earnings to burn through, although the Fed could also sell assets outright.

Powell said the moves are a response to an economy that has both strong job prospects and a Unemployment rate at 3.9% in December, but inflation is expected to exceed 7% over the same period.

“What this really tells us is that the economy no longer needs or wants the very highly accommodative policies we have in place to deal with the pandemic and its aftermath,” Powell said. “We’re really going to move to a more normal policy over the course of the year. But from where we’re at right now, it’s a long way off.”

Facing some questions about why the Fed has misjudged inflation, he again cited issues primarily related to the pandemic, with Powell saying that supply chain congestion, thin inventory on store shelves and rising prices could threaten the recovery.

“If inflation does persist, if these high levels of inflation are ingrained in our economy and in people’s minds, then that will inevitably lead to higher monetary policy,” he said. “This could lead to a recession, which is bad for workers.”

Powell is also facing issues over the financial activities of several officials in recent months, when the Fed was about to implement a series of relief measures before declaring a pandemic.

Fed Vice Chairman Richard Clarida announced on monday he is resigning Following additional disclosures about his buying and selling of stock funds, weeks before the end of his term.Regional Federal Reserve President Eric Rosengren of Boston and robert kaplan of dallas Resigned in 2021 following similar disclosures.

Powell said the Fed will soon issue rules prohibiting similar activities without 45 days’ notice.

“The old system has been around for decades and then suddenly it’s not enough,” he said of the previous rules.