Federal Reserve Chair Jerome Powell testified before members of the Senate on Wednesday that the central bank remains “strongly committed” to combating record-high inflation, although there is a “possibility” of a recession.
Last week, the Fed increased interest rates by 0.75% — the largest incremental rate hike since 1994. The central bank already hiked rates by 0.5% in May — the largest such increase since 2000 — after a 0.25% rate hike from near-zero levels in March. Interest rates are now at 1.5% to 1.75%, with more increases likely on the way.
“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Powell told the Senate Banking, Housing, and Urban Affairs Committee. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”
While the Consumer Price Index (CPI) increased 8.6% year-over-year as of May, the Producer Price Index (PPI) — which tracks inflation for businesses — increased 10.8% over the same period, according to two recent reports from the U.S. Bureau of Labor Statistics.
During the hearing, Sen. Elizabeth Warren (D-MA) noted that the rate hikes could “tip this economy into recession” without stopping inflation, according to CNBC. Rate hikes are meant to curb rising price levels, but they also have the effect of increasing borrowing costs and thereby dampening economic activity.
“You know what’s worse than high inflation and low unemployment is high inflation and a recession with millions of people out of work, and I hope you’ll reconsider that before you drive the economy off a cliff,” Warren said.
The Federal Open Market Committee, which handles the Fed’s monetary policy interventions, has a dual mandate to maximize employment while keeping inflation low. Historically, there has been a tradeoff between the two goals, with low unemployment associated with higher inflation and high inflation associated with lower unemployment.
“It’s certainly a possibility,” Powell told Warren. “It’s not our intended outcome at all, but it’s certainly a possibility, and frankly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market.”
Although rate hikes pose new risks, high inflation is creating hesitance among consumers and other economic actors. When questioned by a Harvard survey about rising price levels, 95% of respondents said that inflation is “very serious” or “somewhat serious.” A plurality — 47% — said that the Biden administration is responsible.
President Biden, however, has argued that “Putin’s Price Hike” — a reference to the Russian invasion of Ukraine and its role in soaring global energy costs — is behind the inflationary pressures.
“High gas prices at the pump, energy, and food prices accounted for around half of the monthly price increases, and gas pump prices are up by $2 a gallon in many places since Russian troops began to threaten Ukraine,” Biden said. “Even as we continue our work to defend freedom in Ukraine, we must do more — and quickly — to get prices down here in the United States.”