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Saturday, June 25, 2022

WATCH: Fed Chairman Powell says rate hike decision will be made ‘meet after meeting’

WASHINGTON ( Associated Press) — Federal Reserve Chairman Jerome Powell on Wednesday stressed the Fed’s determination to raise interest rates high enough to slow inflation, a commitment that fueled fears that the central bank’s fight against rising prices could lead to a recession in the economy.

WATCH: Federal Reserve Implements Highest Interest Rate Raise in Decades to Fight Inflation

Powell also said the pace of future rate hikes will depend on whether — and how fast — inflation starts to decline, which the Fed will assess on a meeting-by-meeting basis.

Decision making will be based on “incoming data and the changing outlook for the economy,” Powell told the Senate Banking Committee, which he addresses as part of the Fed’s semi-annual report to Congress.

The accelerating pace of the Fed’s rate hike — which began with a quarter-point hike in the key short-term rate in March, then half a point in May, and then three-quarters of a point last week — has alarmed investors and led to sharp falls in financial markets.

Powell’s testimony on Wednesday came exactly one week after the Fed announced its three-quarter-point hike, its biggest rise in nearly three decades, to a range of 1.5 to 1.75 percent. With inflation at its highest level in 40 years, Fed policymakers are also projecting a faster pace of rate hikes this year and next than they predicted three months ago, with the key rate reaching 3.8 percent by the end of 2023. highest level in 15 years.

Fears are growing that the Fed will eventually tighten lending conditions enough to trigger a recession. This week, Goldman Sachs estimated the chance of a recession at 30 percent over the next year and 48 percent over the next two years.

The top Republican on the Banking Committee, Sen. Tom Tillis of North Carolina, on Wednesday accused Powell of raising rates too long, saying the Fed hike was “long overdue” and that his base short-term rate should be much higher. .

“The Fed has pretty much put itself on a menu of purely policy retaliation,” Tillis said.

Tillis, like many Republicans, also accused President Joe Biden of the $1.9 trillion financial stimulus package approved in March 2021 being oversized and exacerbating inflation. Many economists agree that the extra spending has driven prices up by boosting demand, even as supply chains have been overwhelmed by COVID-related shutdowns and labor shortages have pushed up wages. Inflationary pressures were further exacerbated by Russia’s invasion of Ukraine.

Biden is expected to call on Congress on Wednesday to suspend US gasoline and diesel taxes to ease the sting of high fuel prices, which average nearly $5 a gallon. Many economists are skeptical that consumers will see the full benefits of the 18.4 cents per gallon gas tax holiday.

Inflation became a major concern for voters in the months leading up to the midterm congressional elections, dampening Biden’s approval ratings and raising the likelihood of a Democratic defeat in November. In taking some steps to try to alleviate the burden of inflation, the president underlined his belief that the ability to curb inflation lies largely with the Fed.

At Wednesday’s hearing, Senator Elizabeth Warren, a Democrat from Massachusetts, challenged Powell’s plans to raise interest rates and asked if they would lower gas or food prices, some of the most visible drivers of inflation. Powell admitted that they would not.

Warren said Biden’s anti-inflation efforts, such as trying to clean up clogged supply chains and more extensive use of antitrust rules to break up monopolies, would fight higher prices more effectively.

According to Warren, the Fed’s rate hike could only slow demand, which would raise unemployment and dampen economic growth.

“You know what’s worse than high inflation and low unemployment?” she asked. “High inflation and a recession with millions out of work.”

“I hope you consider this before you push the US economy off the cliff,” Warren added.

WATCH: Americans struggle with high cost of living amid record inflation

At a press conference last week, Powell suggested that a half or three-quarter point rate hike would be considered at the next Fed meeting in late July. Any of these would exceed the Fed’s quarter-point increase that has been typical in the past, and they reflect the central bank’s struggle to contain high inflation as soon as possible.

Anticipating further significant rate hikes, investors boosted Treasury yields sharply, in part by making the cost of borrowing to buy a home more expensive. With the average 30-year fixed-rate mortgage down to about 5.8 percent—nearly double what it was a year ago—home sales have declined. Credit card and car users also suffer from higher borrowing costs.

Fed officials hope such changes will help meet their goals of cooling demand enough to slow the economy and moderate price increases. In his speech, Powell said higher interest rates “should continue to dampen growth and help better balance supply and demand.”

The Fed’s aggressive pace of rate hikes has heightened fears that it will overly stifle business and consumer credit. But in forecasts released last week, Fed officials predict that while the economy slows sharply this year and next, it will continue to grow. However, they also projected that the unemployment rate would rise by half a percentage point by 2024, which economists say could lead to a recession.

On Wednesday, Powell reiterated his view that the US economy is “very strong and well positioned” to withstand higher rates. However, as inflation hurts millions of US households, he stressed that curbing price hikes by raising rates is the Fed’s top priority.

On Wednesday, the Fed chairman said central bank policymakers “will be looking for hard evidence that inflation is declining” in the coming months before they ease the pace of rate hikes. In a policy report presented to Congress late last week, the Fed said its commitment to fighting inflation was “unconditional.”

For now, most analysts expect a second three-quarter point rate hike at the end of next month and at least half a point when the Fed meets again in September.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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