Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

U.S. economy can withstand Fed tightening, Omicron surge, Powell says

EconomyJan 11, 2022 10:52PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021. Kevin Dietsch/Pool via REUTERS 2/2

By Howard Schneider and Ann Saphir

(Reuters) -Federal Reserve Chair Jerome Powell, in a congressional hearing that pointed to his likely confirmation for a second term as head of the U.S. central bank, said on Tuesday the economy should weather the current COVID-19 surge with only "short-lived" impacts and was ready for the start of tighter monetary policy.

Powell was openly endorsed by Republicans and Democrats on the Senate Banking Committee in a session which focused largely on how the Fed planned to address inflation running at multi-decade highs, why the central bank misdiagnosed the surge in price increases, and what stricter monetary policy would mean for job growth.

The Fed chief said the central bank was determined to ensure that high inflation did not become "entrenched," and that far from diminishing job growth, a turn to higher policy interest rates and a runoff of its asset holdings was necessary to keep the current economic expansion underway.

If prices continue spiking, the Fed could be forced to push through a sharper rise in interest rates this year than the three quarter-percentage-point hikes https://www.reuters.com/markets/us/fed-prepares-stiffen-inflation-response-post-transitory-world-2021-12-15 its policymakers currently anticipate, risking a return to recession.

"Inflation is running very far above target. The economy no longer needs or wants the very accommodative policies we have had in place," Powell said in his testimony.

Yet with the Fed's benchmark overnight interest rate near zero and nearly $9 trillion in assets on its books, "it is a long road" to anything close to restrictive policy, Powell said. In the meantime, Fed actions "should not have negative effects on the employment market," he added.

"You need to focus on getting inflation under control because you're not going to have maximum employment without price stability."

'A BIT NIMBLE'

The hearing had the potential to be combative. Some Democrats have announced their opposition to the renomination of Powell, who was elevated to the top Fed job by former President Donald Trump, and criticized his oversight of Wall Street; a stock trading scandal and the resignation of several top officials has tarred the Fed's image; and some Republicans have argued he is letting the central bank become partisan on issues like climate change and economic inequality.

But it was largely staid and focused on core economic issues, with Powell offering his fullest comments yet on how the unprecedented rise in coronavirus cases has affected his outlook.

Despite the disruptions to schooling, travel and even some core services, "what we are seeing is an economy that functions through these waves of COVID," Powell said.

The dominant theme, if there was one, centered around inflation, the Fed's misdiagnosis of it last year as "transitory," and of the central bank's plans to get in front of it now that it is running well above the 2% target.

Powell said he still felt that while the level of price increases required the Fed to act, some relief would come from beyond monetary policy as global supply chains start to catch up with demand. Mistakenly expecting that adjustment to happen fast, Powell said, is why the Fed at first dismissed rising inflation last year as likely to fade without a Fed response, only to see prices continue to surge to levels not seen since the inflation scares of the 1970s and 1980s.

He said he now thinks inflation will ease by the middle of this year, but that the Fed stood ready to tighten borrowing costs as needed to be sure it does.

"We are going to have to be humble but a bit nimble," Powell said, in deciding when and how fast to raise interest rates and change the Fed's asset holdings, which have ballooned as a result of its pandemic-related support for the economy.

Powell gave no fresh hint about the timing for the liftoff in interest rates, expected by many analysts to begin in March. He also said no decision had been made about when to let the size of the central bank's asset holdings decline, but that it was likely to happen "sooner and faster" than it did following the 2007-2009 recession, when the Fed waited about two years after an initial rate increase to shrink its balance sheet.

U.S. stocks, which started the year on a weak note as the Omicron variant fueled a surge in COVID-19 cases and investors repositioned for a Fed more intent on containing inflation, rose during Powell's testimony. Yields on shorter-dated Treasury securities fell from pandemic-era highs hit earlier in the day.

RATE HIKES

The hearing was a first step in Powell's expected confirmation to a new four-year term. Lael Brainard, currently a Fed governor, will be questioned by the same panel on Thursday for promotion to a four-year term as Fed vice chair.

At the start of Tuesday's session, Democratic Senator Sherrod Brown, the panel's chair, and Senator Pat Toomey, its senior Republican, endorsed Powell's management of the Fed's response to the pandemic, even as they raised questions about its next steps.

"I believe you've shown the leadership" to lead the Fed through debates over inflation, regulation, and an ethics scandal over stock trading by senior officials, Brown said.

Toomey said he was concerned that the Fed's robust response to the pandemic may now be stoking inflation and "could become the new normal," and repeated his criticism of the central bank delving into what he regards as political issues like climate change and inequality.

In December, the Fed decided to end its purchases of Treasuries and mortgage-backed securities - a legacy of its nearly two-year battle with the economic fallout of the pandemic - by March, and signaled it could raise interest rates three times this year.

Financial markets are pricing a slightly more aggressive pace of four rate hikes this year.

U.S. economy can withstand Fed tightening, Omicron surge, Powell says
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (20)
William Bailey
William Bailey Jan 21, 2022 3:32AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Or, you coyld sell farts in a jar if the Fed buys more bonds …
Jan 12, 2022 3:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
He said he now thinks inflation will ease by the middle of this year, but that the Fed stood ready to tighten borrowing costs as needed to be sure it does.
William Bailey
William Bailey Jan 12, 2022 3:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Fed is out of banks . Its the banks not the Fed
Thomas Simpson
Thomas Simpson Jan 11, 2022 6:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Like one drunk said to the other, "we need to drink more so we can stop drinking "
Connecticut Yankee
A_Jaundiced_Eye Jan 11, 2022 3:59PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
This is the old game of the Fed tying to talk down inflation by Threatening to raise rates.  They will raise them, but Much more slowly than they've been talking.  One quick rate hike in March to get everybody's attention, then wait-and-see for the rest of the year.
William Bailey
William Bailey Jan 11, 2022 3:59PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Nope .. 6 hikes to stem infaltion ….But, banjs no longer want stimulus
durmus aydin
durmus aydin Jan 11, 2022 3:56PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
There will be no increase. There is only verbal guidance.
durmus aydin
durmus aydin Jan 11, 2022 3:51PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I think jeromy came for Brandon. Trojan horse.. Biden will lose in the election. for this..this policyes very mistake
durmus aydin
durmus aydin Jan 11, 2022 3:12PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
ostrich powell
durmus aydin
durmus aydin Jan 11, 2022 3:12PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
they never had any intention of controlling inflation.
durmus aydin
durmus aydin Jan 11, 2022 3:10PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
infliation and covid-19..Big game of the rich
durmus aydin
durmus aydin Jan 11, 2022 3:06PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Big speculator Jeromy Powell
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email