Fed Chairman Jerome Powell Testifies to CongressIn a testimony to Congress‚ Federal Reserve Chairman Jerome Powell reiterated that the central bank intends to raise interest rates as high as necessary to curb inflation. As the economy struggles with the effects of surging prices‚ the Fed is grappling with the difficult task of bringing down inflation without triggering a recession. Powell said that future rate hikes will be decided on a meeting-by-meeting basis‚ depending on incoming data and the evolving outlook for the economy.
WASHINGTON (AP)‚ Wednesday's Federal Reserve Chair Jerome Powell tried to reassure Americans that the Fed would raise interest rates fast enough to curb inflation and not tighten credit too much to cause a recession. The economy could be in recession. Powell testified before the Senate Banking Committee. He was confronted with skeptical questions by members from both sides about his ability to control inflation. This is a topic that has risen to the forefront of Americans' concerns‚ as the near congressional election approaches. Democrats questioned whether Fed's rapid rate increases will be effective in curbing inflation‚ or if they might just cause a slowdown. Many Republicans argued that Powell Fed was too slow to raise rates‚ and must now speed up. Powell admitted that it is possible to have a recession as long as the Fed keeps raising borrowing costs. He said it was a possible outcome‚ in answer to a question by Sen. John Tester (a Montana Democrat). Although it is not what we intended‚ it's definitely possible. Powell reiterated that while the Fed's main goal is to lower inflation‚ he said he still hopes for a soft landing -- an inflation reduction and slowdown of growth without creating a recession or high unemployment. Powell stated that the Fed believes it is essential to restore price stability. This was the conclusion of Powell's first day of testimony in the Fed's semi-annual report to Congress. The Fed will evaluate each meeting to determine the rate of inflation decline and decide how fast rates will rise in the future. Investors have been alarmed by the central bank's accelerating rate hikes. It began with a quarter point increase in its key short term rate in March. Then‚ it went to a half-point in May. Last week‚ it was three-quarters off a percentage point. This has led to sharp falls in financial markets. Powells testimony comes exactly a week after the Fed announced its three-quarters-of-a-point increase‚ its biggest hike in nearly three decades the range is 1.5% to 1.59%. Inflation at a 40-year high the Feds' policymakers have also predicted a faster pace for rate increases this year than was anticipated three months ago. Their key rate will reach 3.8% at the end of 2023. This would mark its highest point in fifteen years. There are increasing concerns that the Fed may end up tightening credit to the point of causing a recession. Goldman Sachs has estimated that a recession is possible in the coming year at 3%‚ and 28% for the following two years. On Wednesday‚ a senior Republican‚ Senator Thom Tillis from North Carolina‚ accused Powell of taking too long to raise interest rates. He said that the Fed's rate hikes were long overdue‚ and that the benchmark short-term rate should be much higher. Tillis stated that the Fed had largely confined itself to a list of reactive measures. Like many Republicans‚ Tillis also accused President Joe Biden of excessively large financial stimulus packages‚ which were approved March 2021 at $1.9 trillion‚ and for exacerbating the inflation. Numerous economists believe that this additional spending led to higher prices because it increased demand‚ even though supply chains were choked by COVID-related shut downs and wages were rising. Russia's invasion in Ukraine further exacerbated inflation pressures. Biden congress will be called wednesday to reduce high pump prices that average out to be averaging‚ the U.S. government has decided to suspend U.S. diesel and gasoline taxes for three more months. Nearly $5 a gallon. Economists doubt that the consumers will realize the full benefits of the tax holiday for the 18.4c/gallon gasoline tax. Public anxiety over inflation has hurt Biden's approval rating and increased the possibility of Democratic losses in November. Although the President has taken some steps to reduce inflation's burden‚ he reiterated his belief in the Fed being the best source of control. On Wednesday's hearing‚ Senator Elizabeth Warren (a Democrat from Massachusetts) challenged Powells rate rise plans. She asked if they would lower gas prices or food prices‚ which are the most prominent drivers of inflation. Powell admitted that they would not. Powell stated that the Feds increases can lead to higher borrowing costs‚ such as mortgages and auto loans‚ which could help reduce consumer demand and inflate inflation. Warren‚ along with other Democrats‚ argued that Feds' approach runs the risk of weakening and increasing unemployment while the war in Ukraine raises gas prices and keeps food prices high. This dynamic could be compared to the the 1970s were a time of dread stagflation What's more dangerous than low unemployment and high inflation? She asked. A recession with many people without jobs and high inflation. Warren said‚ "I hope that you will consider this before driving the U.S. economy off the cliff." Warren stated that Biden's attempts to combat inflation (such as clearing supply chain clogs and increasing antitrust rules for breaking up monopolies) would be more effective in fighting higher prices. Powell indicated that the Fed will consider a one-half to three-quarters point rate increase at its next meeting‚ which is scheduled for late July. One of these would be more than the typical quarter-point Fed rate hikes in the past and reflect the central bank’s efforts to reduce high inflation. Investors have pushed Treasury yields up sharply in anticipation of large rate increases ahead. This has made borrowing costs for home purchase more costly. The average fixed 30-year mortgage rate is now at 5.8%‚ nearly double the rate a year ago. Home sales have weakened. Higher borrowing costs are being imposed on auto and credit card customers. Powell said that Wednesday's Fed meeting did not show any sign that inflation has slowed in a significant way. However‚ some price measures (excluding food and gas) have seen a slowdown in recent months. He said that they were looking for it. It wasn't there yet.