The president of the Federal Reserve, Jerome Powell, has made it clear this Wednesday in the United States Senate that his priority is the fight against inflation. In his biannual appearance before Congress, Powell has declared himself “strongly committed” to lowering inflation “in an expeditious manner”, but has admitted the risk of new surprises with inflation. In his view, the US economy is strong and can withstand tighter monetary policy and will continue to raise interest rates. However, fears are growing that this will lead to a recession.
The Federal Reserve approved this month the biggest rate hike since 1994, of 0.75 percentage points. With this, it tries to combat high inflation, which in May was 8.6%, the highest in the last 40 years. Powell has acknowledged that he would have started raising rates ahead of time if he imagined prices would get that out of control. He today he is receiving criticism from some senators. Both Powell and the Treasury secretary initially thought that inflation was going to be a transitory phenomenon that would subside relatively quickly. They were wrong.
“Making monetary policy appropriate in this uncertain environment requires recognizing that the economy tends to evolve unexpectedly,” Powell admitted, adding: “It is clear that inflation has surprised to the upside over the past year, and there could be new surprises. Therefore, we will have to be agile in responding to new data and evolving prospects.”
Powell already indicated after the last meeting of the Federal Reserve’s monetary policy committee that in July he planned a new rate hike of 0.5 or 0.75 points. “I think what you will see is continued progress, rapid progress toward higher interest rates,” he said Wednesday before the Senate Banking Committee. Tomorrow he appears before the Federal Reserve Financial Services Commission.
The unemployment rate is at 3.6%, close to historical lows. The Federal Reserve is aware that its rate hikes will affect demand. “We don’t want to reduce demand, we want to reduce growth, reducing demand would be causing a recession,” she said. Although Powell’s forecasts are still relatively optimistic, the voices that speak of the risk of recession have not stopped growing. This week the president of the United States, Joe Biden, whose popularity has been hit hard by price increases, stated that a recession is not inevitable.
Recession, “a possibility”
In this line, Powell has indicated in his initial speech: “We will strive to avoid adding uncertainty in what is already an extraordinarily difficult and uncertain time. We are very attentive to the risks of inflation and determined to take the necessary measures to restore price stability. The US economy is very strong and well positioned to handle tighter monetary policy.”
The Federal Reserve still believes that a soft landing for the US economy can be achieved, that is, controlling inflation without causing unemployment to skyrocket and the country to enter a recession. “We are not trying to cause, and we do not think it is necessary to cause, a recession,” Powell said on Wednesday. But he acknowledges that there are factors outside his control, such as bottlenecks in the supply chain or the prices of energy and other raw materials, that can make it impossible.
In fact, there is even a risk that the opposite will happen, that activity stops growing, but prices are not contained and the economy enters a phase of stagflation. “You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work,” Democratic Senator Elizabeth Warren snapped.
Asked if rate hikes could cause a recession, Powell admitted: “It’s certainly a possibility. It’s not what we’re looking for, but it’s a possibility.” The president of the Fed has made it clear that the rate hikes will go beyond what is considered the neutral interest rate, the one that neither stimulates nor slows down the economy. Powell wants to see evidence that inflation is contained. When he returns to more moderate levels, he will be able to loosen with rates as well.
“At the Federal Reserve we understand the difficulties that high inflation is causing. We are firmly committed to reducing inflation and are moving expeditiously to do so. We have the necessary tools and the necessary determination to restore price stability for the good of American families and businesses. It is essential that we bring down inflation if we are to have a sustained period of strong labor market conditions that benefit all,” Powell began his opening remarks.
Powell has refused to give lawmakers advice on what they should do to help bring down inflation. “What I have to do is fulfill the mandate that you have given me,” which is to maintain price stability with the highest level of sustainable employment.
Congress will have the opportunity to do its bit with the suspension of the federal fuel tax for three months (from July to September) that Joe Biden, the president of the United States, has demanded of them this Wednesday. That tax is 18 cents per gallon (about 5 cents per liter) for gasoline and 24 cents per gallon for diesel. It is very little, a reduction of 4%, compared to the increase of 60%, about two dollars, that those prices have raised in the last year.