Powell says Fed will keep raising interest rates as long as appropriate
Federal Reserve Chair Jerome Powell on Wednesday said the Fed will continue to raise interest rates in an effort to combat inflation as Americans across the country feel the burden of the fastest price increases in 40 years. But the central bank faces a mounting challenge: easing prices without pushing the country into a recession.
"We anticipate that ongoing rate increases will be appropriate. The pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy," Powell said in testimony at a hearing before the Senate Banking Committee focused on the Fed's semiannual monetary policy report to Congress. Powell will appear before House lawmakers on Thursday.
His congressional testimony comes less than a week after the Fed announced the largest interest rate hike since 1994 — raising the federal funds rate by 0.75% at its June meeting. It was the third time the Fed hiked rates this year, bringing the federal funds rate to 1.5% so far. Central bank officials project the federal funds rate could be between 3% and 3.5% by the end of the year.
During the hearing, Powell acknowledged that poses a significant hardship for Americans and said there has not been any indication yet that prices are coming down. According to the latest data, prices are up 8.6% from a year ago, rising at the fastest pace since 1982. Not including energy and food prices, which are often volatile, prices are up 6% from a year ago.
But as the Fed moves to combat soaring costs, recession fears loom. During the hearing, Democratic Sen. Jon Tester of Montana asked Powell whether he agrees raising interest rates too high, too quickly could drive the U.S. into a recession.
"It's certainly a possibility," Powell responded. "It's not our intended outcome at all, but it's certainly a possibility and frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want."
However, later in the hearing, Powell did say he does not "see the likelihood of a recession as particularly elevated right now." He claimed no one is very good at forecasting a recession very far out. He also said the U.S. economy and spending remain strong.
"Consumers are in good shape, businesses are in good shape," Powell said. "Clearly financial conditions have tightened."
Powell acknowledged that while the Fed has the ability to impact demand, there are factors driving inflation outside the Fed's control. He said achieving a so-called "soft-landing" will be "very challenging" and whether it can be accomplished will depend in part on those outside factors — the war in Ukraine and commodities prices, as well as continued supply chain issues.
When it comes to some of the greatest burdens Americans are facing — rising gas and food prices — Powell acknowledged that the Fed's move to raise interest rates will not help bring those costs down. The cost of food is up more than 10% from a year ago, and gas is up nearly 50% from a year ago.
But despite its inability to impact food and energy prices, Powell said the Fed's efforts would help balance the supply and demand challenges the country faces and ease inflation.
"There are major parts of the economy where demand exceeds supply meaningfully, and that's where our tools have a job to do," Powell said.
During the hearing, Powell declined to weigh in on how congressional activity and spending has affected rising inflation. He did say that rising prices in the United States are comparable to inflation in other countries but said the composition of that inflation was different. He argued U.S. inflation is more demand-driven, while inflation in Europe is driven to a greater extent by energy prices.