Federal Reserve chairman Jay Powell issued a stark warning to Americans already grappling with crippling price increases: More pain will lie ahead if the central bank tries to cut inflation without plunging the economy into recession.
The Fed has begun raising interest rates to slow down borrowing and spending enough to cool inflation, which hit a year-over-year rate of 8.3 percent last month.
But Powell said the drug will bring “some pain” as the Biden administration tries to manage a crisis that threatens to dominate November’s midterm elections.
In an interview with Marketplace, he was asked what he would say to someone who will lose their job or miss out on a raise as the Fed tried to cut inflation spending.
“So I would say we fully understand and realize how painful inflation is, and we have the tools and the determination to bring it down to two percent, and we’re going to do that.
“I will also say that the process of bringing inflation down to two percent will also involve some pain, but in the end the most painful thing would be if we fail to tackle it and inflation settles into a high level in the economy. , and we know what that’s like.
“And those are just people losing their paycheck value to high inflation and eventually we should go through a much deeper downturn. And we really should avoid that.’
Fed Reserve Chairman Jay Powell issued a stark warning to Americans already struggling with crippling price increases on Thursday. Reducing inflation will bring ‘some pain’
Inflation in the US has fallen slightly from a four-decade high reached in March
President Joe Biden has repeatedly said tackling inflation is the number one priority
The central bank has already raised interest rates by 0.75 percentage point since the start of the pandemic.
More gains are expected as the Fed tackles a 40-year high inflation rate.
President Joe Biden said Tuesday he was doing everything he could to stabilize prices
“I want every American to know that I take inflation very seriously and that it is my top domestic priority,” he said.
Powell made his comments shortly after the Senate confirmed him for a second four-year term.
The 80-19 bipartisan vote included opposition from mostly Republicans, but also from Democrat Sens. Elizabeth Warren and Bob Menendez. Menendez argued that Powell hadn’t done enough to promote diversity at the Fed.
While Powell led the Federal Reserve through much of the pandemic through a stronger focus on maximum employment with a higher tolerance for inflation, his agenda is now reversed. The Fed has a twofold mandate: to maintain full employment and keep inflation at about 2 percent a year.
The Fed is now raising interest rates to slow borrowing and spending enough to cool inflation, and is now at 8.3 percent for April from a year ago.
The task of cooling the economy enough to slow inflation without triggering a recession is notoriously difficult — and risky. Economists say such an outcome is possible, but unlikely with such high inflation.
The US central bank started raising its overnight rate benchmark in March and raised it again last week, by half a percentage point – the largest rate hike in 22 years.
Powell’s support in Congress shows that Republicans largely blame President Biden’s spending, especially the US $1.9 trillion bailout package, rather than the Fed’s ultra-low interest rates and its purchases of trillions of dollars in effects.
The Senate Thursday confirmed Federal Reserve Chairman Jerome Powell to a second four-year term as the former investment banker leads the central bank in tightening monetary policy to combat 40-year high inflation.
Inflation started rising in April 2021, meaning annual increases are now starting from a higher base level
Powell said in a news conference after the most recent rate hike that more rate hikes of half a percent are likely to come at future Fed policy meetings.
Still, many economists blame the Fed for waiting too long to tighten monetary policy. For much of 2021, the Fed insisted that inflation would be “transient.” It continued to buy stocks and bonds until March, when prices were already up 8.5 percent from a year earlier. Only in March did the Fed raise its benchmark interest rate from 0.25 percent to 0.5 percent.
The central bank also announced it will begin clearing its $9 trillion in Treasury bonds and other assets next month that have been amassed to smooth out markets and amplify the impact of interest rate cuts amid the pandemic.
Deutsche Bank analysts say Powell’s pivot from super-easy crisis stance to more-than-usual rate hikes that lift the cost of borrowing over the longer term already represents the fastest monetary policy tightening since 1981.
Stocks have struggled in response, with the S&P 500 plummeting 19 percent this year. The tech-heavy Nasdaq fell 29 percent, while the US economy unexpectedly shrank 1.4 percent last quarter.
Major tech companies have lost more than $1 trillion in combined market value in the past three trading sessions, as investors flee risky growth stocks in favor of safer consumer goods.
“In hindsight, says we should have moved sooner,” Powell admitted during a Senate hearing in early March.
The Fed’s prediction that inflation would decline as supply chain bottlenecks were resolved “turned out to be wrong,” he said, “maybe not wrong conceptually, but it just takes so much longer for the supply side to heal than we thought.” ‘
Powell, who has been on the Fed’s Board of Governors since 2012, was first appointed as head of the central bank by President Trump, who later soured Powell over a series of rate hikes.
Biden reappointed Powell, a Republican, and defied demands from progressives to nominate Lael Brainard, who they insisted would align more closely with the president’s robust economic agenda. Brainard eventually got the no. 2 spot.
Chief critic Sen. Elizabeth Warren released Powell in late September, calling him a “dangerous man.”
The Massachusetts Democrat argued that Powell was weakening the U.S. banking system by rolling back financial regulations introduced after the 2008 financial crisis.
“You have acted time and again to make our banking system more insecure, and that makes you a dangerous man to run the Fed, which is why I will oppose your renomination.”
In 2019, the Fed toned down the rules that ensure companies have sufficient liquidity to meet their obligations by lowering liquidity requirements for banks. The guidelines were introduced after the 2008 crisis.
Other progressives led by Ocasio-Cortez and fellow Squad members Reps Rashida Tlaib and Ayanna Pressley accused Powell of not caring enough about climate change.
“Under his leadership, the Federal Reserve has taken very little action to mitigate the risk of climate change to our financial system,” they wrote in a letter, adding later: “Second, the Federal Reserve under Chairman Powell has taken a lot of reforms have been considerably weakened. issued in the wake of the Great Recession.”