(Bloomberg) -- Federal Reserve Chair Jerome Powell said the central bank won’t hesitate to act if needed to contain inflation and help ensure full employment, though the mismatch between supply and demand that’s driven up prices was expected to abate.
“If we have to raise interest rates more over time, we will,” Powell said Tuesday in response to a question at his confirmation hearing at the Senate Banking Committee. “We will use our tools to get inflation back.”
Both Republicans and Democrats have expressed concern that the Fed is over-stimulating the economy with low rates and bond purchases as inflation runs far above officials’ 2% target. U.S. central bankers have been surprised by the persistence of inflation and want to lean against it this year without stalling out growth.
Prices rose 5.7% for the 12-months ending November as measured by the personal consumption expenditures price index, the Fed’s preferred benchmark.
While stressing that the Fed does not prioritize its congressional mandate for price stability more than the goal for full employment, he said that the emphasis can shift and at the moment there was more focus on inflation.
‘Severe Threat’
“To get the kind of very strong labor market we want with high participation, it is going to take a long expansion,” he said. “To get a long expansion we are going to need price stability. And so in a way, high inflation is a severe threat to the achievement of maximum employment.”
Investors are betting the Fed will begin raising its benchmark federal funds rate in March, two years after cutting it to nearly zero at the onset of the pandemic in March 2020. A Labor Department report Friday showing the U.S. unemployment rate fell to 3.9% in December -- closing in on the 3.5% pre-pandemic low.
Fed officials in December said they would accelerate end of their asset purchase program, and forecast they would raise rates three times this year. Wall Street firms such as Goldman Sachs Group Inc (NYSE:GS). are forecasting as many as four increases.
Powell, asked about plans to shrink the Fed’s $8.77 trillion balance sheet, said at some point this year he and his colleagues will allow the balance sheet to run off. His remarks follow comments from other Fed officials favoring a start to shrinking the balance sheet fairly soon after the central bank begins raising rates.
President Joe Biden nominated Powell for a second term as chair and picked Fed Governor Lael Brainard to serve as vice chair. Biden is also expected to soon nominate three new governors to fill remaining vacancies. Brainard’s confirmation hearing is scheduled for Thursday.
(Adds more Powell comments from sixth paragraph.)
©2022 Bloomberg L.P.