WASHINGTON — Federal Reserve Chair Jerome Powell sought Wednesday to reassure the public that the Fed will raise interest rates high and fast enough to quell inflation, without tightening credit so much as to throttle the economy and cause a recession.
Testifying to the Senate Banking Committee, Powell faced skeptical questions from members of both parties about the Fed's ability to tame inflation, which has surged to the top of Americans' concerns as congressional elections near.
Democrats wondered whether the Fed’s accelerated rate hikes will succeed in curbing inflation or might instead just tip the economy into a downturn. Several Republicans charged that the Powell Fed had moved too slowly to begin raising rates and now must speed up its hikes and endanger the economy.
While the Fed's primary goal now is to reduce inflation, Powell stressed, he still hopes to achieve what he has called a “soft landing” — a reduction in inflation and a slowdown in growth without triggering a recession and high unemployment.
“I don't think we need to provoke a recession,” Powell said on the first of two days of testimony as part of the Fed’s semiannual report to Congress. “But we do think it’s absolutely essential that we restore price stability, really for the benefit 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 to decline, something the Fed will assess on a “meeting by meeting” basis.
The central bank's accelerating pace of rate increases — it started with a quarter-point hike in its key short-term rate in March, then a half-point increase in May, then three-quarters of a point last week — has alarmed investors and led to sharp declines in the financial markets.
Powell's testimony comes exactly a week after the Fed announced its three-quarters-of-a-point increase, its biggest hike in nearly three decades, to a range of 1.5% to 1.75%. With inflation at a 40-year high, the Fed's policymakers also forecast a more accelerated pace of rate hikes this year and next than they had predicted three months ago, with its key rate reaching 3.8% by the end of 2023. That would be its highest level in 15 years.
Concerns are growing that the Fed will end up tightening credit so much as to cause a recession. This week, Goldman Sachs estimated the likelihood of a recession at 30% over the next year and at 48% over the next two years.
A senior Republican on the Banking Committee, Sen. Thom Tillis of North Carolina, on Wednesday accused Powell of having taken too long to raise rates, saying the Fed’s hikes “are long overdue” and that its benchmark short-term rate should go much higher.
“The Fed has largely boxed itself into a menu of purely reactive policy measures,” Tillis said.
Tillis, like many Republicans, also blamed President Joe Biden’s $1.9 trillion financial stimulus package, approved in March 2021, for being excessively large and exacerbating inflation. Many economists agree that the additional spending contributed to rising prices by magnifying demand even while supply chains were snarled by COVID-related shutdowns and labor shortages were driving up wages. Inflation pressures were further worsened by Russia's invasion of Ukraine.
Biden is expected on Wednesday to call on Congress to suspend U.S. gas and diesel taxes to reduce the sting of high fuel prices, which are averaging nearly $5 a gallon. Many economists are skeptical that consumers will see the full benefit of a tax holiday on the 18.4 cent per gallon gas tax.
The public's anxiety about inflation has weakened Biden’s approval ratings and raised the likelihood of Democratic losses in November. While taking some steps to try to ease the burden of inflation, the president has stressed his belief that the ability to curb inflation rests mainly with the Fed.
At Wednesday's hearing, Sen. Elizabeth Warren, a Democrat from Massachusetts, challenged Powell's rate hike plans and asked whether they would reduce gas or food prices, some of the highest-profile drivers of inflation. Powell acknowledged that they wouldn't.
Warren said that Biden's efforts to fight inflation, such as trying to clear clogged supply chains and increasing the use of antitrust rules to break up monopolies, would more effectively fight higher prices.
Fed rate hikes, though, can only slow demand, which will raise unemployment and weaken growth, Warren said.
“You know what’s worse than high inflation with low unemployment?” she asked. "High inflation and a recession with millions of people out of work.”
“I hope you consider that before you drive the U.S. economy off a cliff," Warren added.
At a news conference last week, Powell suggested that a rate hike of either one-half or three-quarters of a point will be considered at the Fed’s next meeting in late July. Either one would exceed the quarter-point Fed hikes that have been typical in the past, and they reflect the central bank’s struggle to curb high inflation as quickly as possible.
Anticipating additional large rate hikes ahead, investors have sent Treasury yields sharply higher, making borrowing costs for home purchases, in particular, more expensive. With the average 30-year fixed mortgage rate up to roughly 5.8% — nearly twice the rate just a year ago — home sales have weakened. Credit card users and auto are also being hit with higher borrowing costs.
In projections they issued last week, Fed officials forecast that while the economy will slow sharply this year and next, it will continue to grow. They also forecast, though, that the unemployment rate will rise a half-percentage point by 2024, an increase that economists say could lead to a recession.
Powell also said Wednesday that the Fed isn't yet seeing any signs that inflation is moderating in a meaningful way, even though some price measures, excluding gas and food, have slowed a bit in the past four months.
“We're looking for that,” he said. “We're not seeing it yet.”