Interest rates

“If we need to raise interest rates further over time, we will”

Federal Reserve Chairman Jerome Powell told Congress on Tuesday that if the pace of price hikes did not slow, the central bank would become more aggressive in raising short-term borrowing costs.

“If we see inflation persist at high levels, for longer than expected, if we need to raise interest rates further over time, then we will,” Powell said at a hearing before the committee. senatorial bank.

Powell faces the Senate for his reappointment. President Joe Biden announced in November that he was hiring Powell for a second term as central bank head, with current Fed Governor Lael Brainard serving as vice chairman (his confirmation hearing is scheduled for Thursday).

Stakes are high for the Fed this year, with inflationary impressions showing prices up almost 7% year-on-year.

The Fed has spent about a year trying to determine to what extent these price increases are due to growing demand (which allows producers to raise prices) or limited supply (in which COVID-related disruptions increase prices). production input costs).

Powell said both appear to be contributing to high inflation, but the Fed chief admitted demand is “very strong” at the moment.

FILE – Federal Reserve Chairman Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill in Washington on Tuesday, November 30, 2021. High inflation is wreaking havoc on American families, acknowledged Powell in remarks to be delivered at a Congressional hearing on Tuesday, Jan. 11, 2022, where he is sure to face some tough questions on the matter. (AP Photo / Andrew Harnik, file)

The Fed’s most powerful tool remains interest rates, which the central bank has kept at zero since the depths of the pandemic. Rising interest rates could meet higher demand by making borrowing more expensive. But higher borrowing costs probably wouldn’t do much to address supply issues like shipping bottlenecks in ports around the world.

“We can affect demand, we can’t affect supply. But it’s really a combination of the two, ”said Powell.

It’s time to retire

Fed watchers say the central bank is moving quickly to step up efforts to reverse easy monetary policies in the era of the pandemic.

In addition to keeping interest rates zero, the central bank has absorbed trillions of US treasury bills and agency mortgage-backed securities. The so-called quantitative easing program has served as a messaging device to markets on its intention to maintain “accommodative” policies.

Faced with inflation, the Fed now plans to end this program earlier than expected (the current plan being to end all purchases by March). The Fed will then seek to raise interest rates.

For the Fed, which also prioritizes the health of the labor market, a steady pace of monthly employment increases has given policymakers confidence they can tighten policies without disrupting hiring.

“It is really time for us to start moving away from these emergency pandemic parameters and back to a more normal level. It really shouldn’t have negative effects on the job market, ”said Powell.

Powell is expected to navigate to confirmation, which will first involve an audit by the Senate Banking Committee, followed by a full vote from the 100-member Senate.

Powell used to gain bipartisan support across multiple jurisdictions. Republican by affiliation, Powell was confirmed to the Fed’s board of directors as governor under the Obama administration, securing a 74-21 vote in 2012. When Trump called on Powell to replace Janet Yellen at the helm from the Fed, Powell easily got confirmation in an 84 to 13 vote.

Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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