Powell: ‘Very strong’ US economy can withstand rate hikes

Federal Reserve Chairman Jerome Powell touted the strength of the U.S. economy Wednesday and expressed confidence it can handle the central bank’s higher interest rates despite rising fears of a recession among economists.

Testifying before the Senate Banking Committee, Powell acknowledged the U.S. faces serious challenges in curbing inflation and navigating an “extraordinarily challenging and uncertain time” for the global economy.

Even so, Powell signaled optimism in the Fed’s ability to bring down inflation without causing a recession, despite deepening fears of a downturn.

“We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well-positioned to handle tighter monetary policy,” Powell said in his opening remarks.

Powell cited an unemployment rate of 3.6 percent, an average monthly gain of 408,000 jobs over the past three months and other signals of a strong labor market as signs of a strong and resilient U.S. economy.

But Powell lingered far longer on the threats inflation poses to the sturdy labor market and the obstacles the Fed faces in bringing it down.

Consumer prices rose 8.6 percent annually in May and 1 percent last month, according to the Labor Department’s consumer price index (CPI), a closely watched gauge of inflation. Three days after the release of the new CPI data, the Fed boosted its baseline interest range by 0.75 percentage points despite signaling for weeks it would only hike by 0.5 percentage points.

“Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” Powell said Wednesday. 

“We therefore will need to be nimble in responding to incoming data and the evolving outlook.”

The Fed has hiked its baseline interest rate range by a total of 1.5 percentage points since March after opening the year with rates near zero.

While the Fed faced growing pressure to hike rates last year as inflation rose, Powell and other Fed officials held off under the assumption that inflation would fall as pandemic-related supply chain snarls and labor shortages eased.

Still, inflation has continued to rise thanks to a combination of several coronavirus-related shocks, along with the war in Ukraine and economic sanctions imposed on Russia limiting the global supply of wheat, oil, fertilizer and other crucial commodities. 

Higher interest rates set by the Fed can help reduce inflation by slowing consumer and business spending. As individuals and firms cut back spending to cover the higher costs of borrowing, businesses may be forced to stabilize or cut prices as their sales decline.

Fed rate hikes, however, have little ability to boost the supply of goods limited by the war in Ukraine and COVID-19 containment policies in China.

Economists at Goldman Sachs have boosted their odds of the U.S. hitting a recession this year from 15 percent to 30 percent and the odds of a recession in 2023 from 35 percent to 48 percent.  

“We are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” Goldman Sachs economists David Mericle and Ronnie Walker wrote in a Monday research note.  

The White House is trying to tamp down fears of a recession with the midterm elections looming in November and Democrats facing long odds of maintaining their majorities in the House and Senate. As consumer sentiment plunges and inflation continues to rise, Republicans have pinned the blame for the squeeze on President Biden and the $1.9 trillion stimulus bill he signed in March 2021.

While most economists agree the stimulus bill helped stoke inflation higher, they say it is only one of several forces — many of which beyond Biden’s control — fueling high inflation. Some economists also argue the bill has been essential to the pace of the recovery from the pandemic and withstanding the high inflation that would have followed even without the additional stimulus.

Updated at 10:55 a.m.

Tags government spending inflation inflation rates Jerome Powell

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