US Federal Reserve Chair Jerome Powell sought on Wednesday to reassure the public that the Fed will raise interest rates high and fast enough to quell inflation, without tightening credit so much as to throttle the economy and cause a recession.
Testifying to the Senate Banking Committee, Powell faced skeptical questions from members of both parties about the Fed’s ability to tame inflation, which has surged to the top of Americans’ concerns as congressional elections near.
“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell said. The Fed in coming months will be looking for “compelling evidence” of slowing price pressures before it eases up on the interest rate increases it kicked off three months ago.
Inflation continues to run at least three times higher than the Fed’s targeted level of 2%. A gauge of price increases that excludes volatile food and energy costs may have eased somewhat last month, Powell testified, but Russia’s invasion of Ukraine and COVID-19 lockdowns in China are putting continued upward pressure on inflation.
Along with expressing resolve on inflation, Powell said economic conditions are generally favorable, with a strong labor market and persistently high demand.
But Sen. Elizabeth Warren, D-Mass., warned Powell that the continued rate hikes could “tip this economy into recession” without stopping inflation.
“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,” she said.
Though Powell said he believes the economy is strong now, he acknowledged a recession could happen.
“We need to get inflation back down to 2%,” Powell told lawmakers. “We’re using our tools to do that. And the public should believe that we will get inflation back down to 2% over time.”
Sen. Elizabeth Warren, D-Mass., cautioned that an abrupt increase in borrowing costs could produce a surge in layoffs, while doing little to untangle supply shocks that have driven up the price of gasoline and groceries.
“You know what’s worse than high inflation and low unemployment?” Warren said. “It’s high inflation and a recession with millions of people out of work. I hope you’ll reconsider that, before you drive this economy off a cliff.”
“Right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer.”
Warren asked what was worse than high inflation and low unemployment and then gave Powell an answer: High inflation with a recession and millions without jobs.
“I hope you consider that before you drive this economy off a cliff,” she said.