Federal Reserve chair Jay Powell issued a stark warning to Americans already struggling with crippling price rises: There will be more pain ahead as the central bank tries to bring down inflation without plunging the economy into recession.
The Fed has begun raising interest rates to slow borrowing and spending enough to cool inflation, which hit a year-on-year rate of 8.3 percent last month.
But Powell said the medicine will bring ‘some pain’ as the Biden administration tries to manage a crisis that threatens to dominate November’s midterm elections.
In an interview with Marketplacehe was asked what he would say to someone who will lose their job or miss out on a pay rise as the Fed tried to choke off inflationary spending.
‘So I would say that we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to two percent, and that we’re going to do that.
‘I will also say that the process of getting inflation down to two percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels , and we know what that’s like.
‘And that’s just people losing the value of their paycheck to high inflation and, ultimately, we’d have to go through a much deeper downturn. And so we really need to avoid that.’
Fed Reserve chair Jay Powell delivered a stark warning to Americans already struggling with crippling price rises on Thursday. Bringing down inflation will bring ‘some pain’
Inflation in the US has fallen slightly from the four-decade high it reached in March
President Joe Biden has repeatedly said tackling inflation is his number one priority
The central bank has already raised interest rates by 0.75 percentage points from the near-zero levels in place since the start of the pandemic.
More rises are expected as the Fed tackles a 40-year inflation high.
President Joe Biden on Tuesday said he was doing everything possible to stabilize prices
‘I want every American to know that I’m taking inflation very seriously and it’s my top domestic priority,’ he said.
Powell made his comments soon after the Senate confirmed him to a second four-year term.
The bipartisan 80-19 vote included opposition from mostly Republicans, but also from Democrat Sens. Elizabeth Warren and Bob Menendez. Menendez claimed Powell had not done enough to promote diversity at the Fed.
While Powell led the Federal Reserve through a heavier focus on maximum employment with a higher tolerance for inflation through much of the pandemic, his agenda has now reversed course. The Fed has a dual mandate – maintaining full employment and keeping inflation around 2 percent annually.
The Fed is now in the process of raising interest rates to slow borrowing and spending enough to cool off inflation, now running at 8.3 percent for April from one year ago.
The task of cooling the economy enough to slow inflation without causing a recession is notoriously difficult – and risky. Economists say such an outcome is possible but unlikely with inflation this high.
The US central bank began lifting its benchmark overnight lending rate in March and last week raised it again, by half a percentage point – the largest rate increase in 22 years.
Powell’s support in Congress demonstrates that Republicans largely blame President Biden’s spending, specifically the $1.9 trillion American Rescue package, rather than the Fed’s ultra-low interest rates and purchasing of trillions of dollars in securities.
The Senate on Thursday confirmed Federal Reserve chair Jerome Powell to a second four-year term, as the former investment banker leads the central bank in tightening monetary policy to fight 40-year high inflation
Inflation began to soar in April 2021, meaning that annual increases are now starting from a higher base level
Powell in a press conference after the most recent interest rate hike signaled more half-percent rate hikes are likely to come at future Fed policy meetings.
Still, many economists blame the Fed for waiting too long to tighten monetary policy. For much of 2021 the Fed was insisting that inflation would be ‘transitory.’ It continued buying stocks and bonds until March, when prices had already soared 8.5 percent from a year earlier. It was only in March that the Fed raised its benchmark interest rate from 0.25 percent to 0.5 percent.
The central bank also announced that next month it will start culling its $9 trillion portfolio of Treasury bonds and other assets accumulated to smooth markets and augment the impact of rate cuts made during the pandemic.
Deutsche Bank analysts say Powell’s pivot, from a super-easy crisis policy to bigger-than-usual rate hikes that are lifting longer-term borrowing costs, already amounts to the quickest monetary policy tightening since 1981.
Stocks have struggled in response, with the S&P 500 tumbling 19 percent this year. The tech-heavy Nasdaq has declined 29 percent, meanwhile the US economy unexpectedly shrank 1.4 percent last quarter.
Major technology firms have lost more than $1 trillion in combined market value over the past three trading sessions, as investors flee risky growth stocks in favor of safer consumer staples.
‘Hindsight says we should have moved earlier,’ Powell acknowledged during a Senate hearing in early March.
The Fed’s prediction that inflation would ease as supply chain bottlenecks cleared up ‘turned out to be wrong,’ he said, ‘not maybe conceptually wrong, but it’s just taking so much longer for the supply side to heal than we thought.’
Powell, who has been with the Fed’s Board of Governors since 2012, was first appointed to head the central bank by President Trump, who later soured on Powell for a series of rate hikes.
Biden renominated Powell, a Republican, defying the demands of progressives to nominate Lael Brainard, who insisted more closely aligned with the president’s robust economic agenda. Brainard ended up getting the no. 2 spots.
Lead critic Sen. Elizabeth Warren unleashed on Powell in late September, calling him a ‘dangerous man.’
The Massachusetts Democrat argued that Powell weakened the US banking system by rolling back financial regulations that were enacted after the 2008 financial crisis.
‘Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed, and it’s why I will oppose your re-nomination.’
In 2019, the Fed weakened rules that ensure that firms have adequate cash to meet their obligations by lowering liquidity requirements for banks. The guidelines were put in place after the 2008 crisis.
Other progressives led by Ocasio-Cortez and fellow Squad members Reps. Rashida Tlaib and Ayanna Pressley accused Powell of not caring enough about climate change.
‘Under his leadership the Federal Reserve has taken very little action to mitigate the risk climate change poses to our financial system,’ they wrote in a letter, later adding: ‘Secondly, under Chair Powell the Federal Reserve has substantially weakened many of the reforms enacted in the wake of the Great Recession.’