This week Federal Reserve Chair Jerome Powell called his commitment to curbing inflation “unconditional” and backed raising interest rates by 75 basis points again next month, even as he acknowledged that “a recession is now more likely than not”.
Powell's testimony marked a second straight day of grilling in Congress over the Fed's efforts to control red-hot inflation that by the central bank's preferred measure – is running at more than three times over its 2% target.
During his testimony, Powell told the Senate Banking Committee that the Fed was not trying to provoke a recession but that one was "certainly a possibility” – due to several key inflation triggers outside the Fed's control – such as the war in Ukraine, supply chain disruptions and effects of COVID related shutdowns in China, which all further complicate the outlook.
Over the last 12 months, inflation has spread to every corner of the economy with primary Cost of Living Expenses from Food, Fuel, Rent, Clothing and Energy prices – rising at double-digit annual rates for the first time in over 40 years. This is return is sapping purchasing power, hurting businesses and lifting fears of a sharp economic downturn and a steep rise in unemployment.
Lawmakers quizzed Powell several times about the burden imposed by the Fed’s recent moves to combat inflation and how raising rates actually fights inflation, referring to rate hikes as "blunt" instruments.
Last week, the central bank put in place the biggest interest rate increase since 1994, signalling its support for what is set to be the most forceful campaign to tighten monetary policy since the 1980s.
Democratic U.S Senator Elizabeth Warren challenged the effectiveness of the Fed's rate hikes. Warren asked whether rate increases would help lower food or gas prices. To which Powell admitted that they wouldn't.
“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work, said Warren. “I hope you will consider that before you drive the economy off a cliff”.
Powell wrapped up his testimony, by not ruling out more surprises when it comes to inflation, stating 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," he said.
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