Fed Chair Powell says price hikes, tighter coverage shall be wanted to regulate inflation

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Federal Reserve Chairman Jerome Powell speaks during his reappointment hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, United States, January 11, 2022.

Graeme Jennings | Reuters

Federal Reserve Chair Jerome Powell, with a seemingly clear path to a second term at the helm of the central bank, said Tuesday that the US economy is both healthy enough and in need of tighter monetary policy.

As part of his confirmation hearing before the US Senate Committee on Banking, Housing and Urban Affairs, Powell said he expects a slew of rate hikes this year, as well as further cuts to the extraordinary aid the Fed has been providing during the pandemic era.

“As we move through this year…if things play out as expected, we will normalize monetary policy, which means we will end our asset purchases in March, which means we will raise rates throughout the year,” he told the committee members. “Sometime maybe later this year we will start to let the balance sheet expire and that’s just the way to normalize politics.”

He made the remarks during a two-and-a-half-hour session that included both praise for the Fed’s handling of the economy and criticism of perceived ethical flaws by central bank officials. Some Republican senators also expressed concern that the Fed was deviating too far from its stated goals of price stability, full employment and banking supervision.

Ultimately, however, Powell appeared to be heading for successful confirmation by the entire Senate. Committee chair Sherrod Brown, D-Ohio, and Pennsylvania Sen. Patrick Toomey, the ranking Republican, both said they intend to support President Joe Biden’s nomination. Senator Elizabeth Warren, D-Mass., said she will oppose the nomination after calling Powell “dangerous” during a hearing last year.

Many of the questions from both sides of the aisle focused on inflation, which is at a near 40-year high. After declaring the hike “temporary” for much of 2021, the Fed has braced itself for inflation and is expected to raise rates three or four times this year in quarter-point increments.

Higher interest rates control inflation by slowing the flow of money that’s rapidly flowing through the economy as the Fed and Congress have collectively provided more than $10 trillion in stimulus.

“If we see inflation staying high longer than expected, then that’s what we’ll do if we need to keep raising interest rates over time,” Powell said. “We will use our tools to get inflation back.”

Secure jobs, fight inflation

In addition to raising interest rates, the Fed is also tapering monthly asset purchases, which have added more than $4.5 trillion to its balance sheet since the pandemic began. Officials have also indicated that later this year they will begin reducing the balance sheet, most likely by forfeiting a certain amount of proceeds each month, although the Fed could also sell assets outright.

Powell said the moves are in response to an economy that has both a strong employment picture, with an unemployment rate of 3.9% in December, and inflation expected to top 7% year-on-year for the same period.

“What this is really telling us is that the economy no longer needs or wants the very accommodating policies that we have put in place to deal with the pandemic and its aftermath,” Powell said. “We’re really just going to move to a policy that’s closer to normality later this year. But it’s a long way to normality from where we are.”

He faced some questions about why the Fed misread its inflation announcement, and he again cited issues mostly related to the pandemic, which has seen congested supply chains, sparsely stocked store shelves and rising prices, which Powell said were causing them could jeopardize recovery.

“If inflation continues, if these high levels of inflation become entrenched in our economy and in people’s minds, then inevitably that will lead to much higher monetary policy,” he said. “That could lead to a recession and that will be bad for workers.”

Powell also faced questions about a controversy over the past few months over several officials’ financial activities as the Fed looked to implement a series of bailout measures just ahead of the pandemic declaration.

Federal Reserve Vice Chairman Richard Clarida announced Monday that he will be stepping down a few weeks before his term expires, following additional disclosures about his buying and selling of equity funds. Regional Fed Presidents Eric Rosengren of Boston and Robert Kaplan of Dallas resigned in 2021 after similar disclosures.

Powell said the Fed will soon release rules that would ban similar activities without 45-day notice.

“The old system was in place for decades and then suddenly it turned out to be insufficient,” he said of the earlier rules.