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Fed's inflation fight is 'unconditional,' Powell says

Economy Jun 23, 2022 06:50PM ET
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© Reuters. Federal Reserve Chair Jerome Powell reacts as he testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on the "Semiannual Monetary Policy Report to the Congress", on Capitol Hill in Washington, D.C., U.S., June 22, 2022. REUTERS/

By Lindsay (NYSE:LNN) Dunsmuir and Ann Saphir

(Reuters) - The Federal Reserve's commitment to reining in 40-year-high inflation is "unconditional," U.S. central bank chief Jerome Powell told lawmakers on Thursday, even as he acknowledged that sharply higher interest rates may push up unemployment.

"We really need to restore price stability ... because without that we're not going to be able to have a sustained period of maximum employment where the benefits are spread very widely," Powell told the U.S. House of Representatives Financial Services Committee. "It's something that we need to do, we must do."

Powell's testimony marked a second straight day of grilling in Congress over the Fed's efforts to control inflation that, by the central bank's preferred measure, is running at more than three times its 2% target. Fast-rising prices for gas, food, housing and a broad array of other items are sapping American wages, hurting businesses, and lifting fears of a sharp economic downturn and a steep rise in unemployment.

On Wednesday, Powell told the U.S. Senate Banking Committee that the Fed was not trying to provoke a recession but that one was "certainly a possibility," with recent global events, specifically the Ukraine war and COVID-19 pandemic, making it more difficult to tame inflation without inducing a downturn.

Price pressures have continued to build for months, forcing the Fed to ramp up its tightening of financial conditions in an attempt to cool demand while hoping that some supply chain issues begin to untangle this year.

Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point - its biggest hike since 1994 - to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year.

Speaking in a June 15 news conference, Powell said the central bank would very likely need to raise rates by either 50 or 75 basis points at its next meeting in July. Since then, other Fed officials have echoed his stance on getting borrowing costs into slightly restrictive territory in short order.

Some have gone further.

Fed Governor Michelle Bowman on Thursday said she supported a 75-basis-point increase in July, followed by 50-basis-point increases in "the next few" subsequent meetings, a more aggressive path of rate hikes than most of her fellow central bankers currently contemplate.

Economists polled by Reuters earlier this week forecast the Fed would deliver another 75-basis-point rate hike next month, followed by a half-percentage-point rise in September, with no scaling back to quarter-percentage-point moves until November at the earliest.

NO PRECISION TOOLS

There are already some tentative signs of softening in the still red-hot U.S. labor market. Data released on Thursday showed new claims for unemployment benefits, which hit a 53-year low in March, edged down last week while a key gauge of manufacturing and services activity cooled to its slowest growth path in five months.

Under questioning by members of the House panel on Thursday, Powell said there was a risk the Fed's actions could lead to a rise in unemployment. The U.S. jobless rate stood at 3.6% in May.

"We don't have precision tools," he said, "so there is a risk that unemployment would move up, from what is historically a low level though. A labor market with 4.1% or 4.3% unemployment is still a very strong labor market."

At the same time, however, Powell said a recession is not inevitable, as even former Fed colleagues have claimed; he expects U.S. economic growth to pick up in the second half of this year after a sluggish start to 2022.

Over the course of the three-hour session, Powell was asked about the possibility of raising the Fed's 2% inflation target, a solution proposed in some circles as one way to give the central bank more scope to boost employment. His response was definitive: "That's just not something we would do."

Powell was equally dismissive of the possibility of cutting interest rates in a hypothetical situation where unemployment was rising and inflation remained high. "We can't fail on this: we really have to get inflation down to 2%," he said.

The Fed chief also was asked about the central bank's balance sheet, which was built up to around $9 trillion during the pandemic in an effort to ease financial conditions and is now being pared. The Fed aims to get it "roughly in the range of $2.5 or $3 trillion smaller than it is now," Powell said.

Fed's inflation fight is 'unconditional,' Powell says
 

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Comments (8)
BD
BD Jun 24, 2022 3:35AM ET
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In other words, get ready for a recession. People aren't listening to Powell.
Barani Krishnan
Barani Krishnan Jun 23, 2022 6:55PM ET
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Consumption will crash at some point; that's what they need to do to bring inflation down. But it isn't happening yet. Try 100 bps three months in a row. It will probably happen. They need to crash the stock market (quarter of the job done), the property market (barely a ding there yet) and job market (ditto). The three cumulatively lead to demand. If people cut summer traveling, flights and commute to work (those possible WFH), about 20 to 30% of oil demand could easily disappear. The flat price will be back to around 80, maybe closer to 70. None of that is happening as yet because the consumer is still at his strongest in a generation, still able to pick up cheapened stocks, property (despite these mortgage rates) and get hired again on walking out of a job.
jonathan seagull
jonathan seagull Jun 23, 2022 6:21PM ET
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According to his words, there will be no fed pivot. I do not mean fed will succeed in controlling inflation. In fact, like wildfire in deep mountain, eventually inflation will win. In other words, stagflation.
Steffen vdm
Steffen vdm Jun 23, 2022 5:15PM ET
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Powell is a post turtle
Ac Tektrader
Ac Tektrader Jun 23, 2022 4:57PM ET
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unconditional .....oh oh.... we've seen unconditional before. higher % rates are coming.
Ac Tektrader
Ac Tektrader Jun 23, 2022 4:53PM ET
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when the recession becomes more apparent, opec members will start driving down crude prices with major sales of crude into world markets.
Ac Tektrader
Ac Tektrader Jun 23, 2022 4:43PM ET
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nato and the west will weather the storm.. Russia will not.....
Jun 23, 2022 11:52AM ET
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We will see how unconditional it is when the stock market goes down another 30%
Jeff Chevalier
Jeff Chevalier Jun 23, 2022 11:52AM ET
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They don't care. The market is NOT the economy.
Steffen vdm
Steffen vdm Jun 23, 2022 11:52AM ET
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Jeff Chevalier only in good times
 
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