(Kitco News) Federal Reserve Chair Jerome Powell said the US central bank was “strongly committed” to controlling inflation and was moving “swiftly” to do so.
Powell reiterated his commitment to the Fed’s aggressive rate hike in light of stubbornly high inflation.
“My colleagues and I are acutely aware that high inflation poses significant difficulties,” Powell testified before the Senate Banking Committee. “In the coming months, we are looking for strong evidence that steady inflation is coming down, with inflation returning to 2 percent. We expect ongoing rate increases to be appropriate; the pace of those changes will depend on incoming data and the evolving outlook for the economy.”
Powell explained to US senators on Wednesday that the Fed is now “paying close attention” to the risks posed by high inflation and understands the “full scope of the problem” and is using its tools to address it “very acutely.”
The decision to raise rates by 75 basis points in June reflects that thinking. “We felt it was appropriate to move more aggressively,” Powell said. “Right now, the labor market is unsustainably hot. On the inflation side, we are far from our goal. We need to restore price stability in the long run to have maximum employment. Don’t think we need to.
Powell noted that inflation data available in May indicate that the core measure is holding at or slightly below the same level. But several major inflation triggers are out of the Fed’s control – the Russian invasion of Ukraine, supply chain disruptions and the effects of COVID-related shutdowns in China.
“The rise in crude oil and other commodity prices triggered by the Russian invasion of Ukraine is driving up gasoline and fuel prices and creating additional upward pressure on inflation. COVID-19-related lockdowns in China are likely to exacerbate the ongoing supply chain. Interruptions,” Powell explained. “I don’t expect we’ve seen the full effects of China lockdowns … as long as the zero-COVID policy is in place, you can have a recurrence.”
Powell did not rule out more surprises when it came to inflation, saying that the economy usually evolves in unexpected ways. “Inflation has certainly raised surprises over the past year, and further surprises may be in store,” he said.
Risk of recession ‘not increased now’
In terms of the risks of the recession, Powell reiterated that the American economy is “very strong” and is well positioned to maintain a tight monetary policy. The likelihood of a recession is “not particularly high right now,” he said.
The Fed president explained that the goal is to achieve price stability without triggering a recession. “The events of the last few months have made it more challenging. There are ways to do it,” Powell said. But inflation depends on how long the war in Ukraine will take and how long it will take to restore supply chains.
Powell was grilled by several US senators on how to raise rates and fight inflation, citing rate increases as a “blunt” tool. The Fed Chair responded that the goal of aggressively raising rates is to reduce demand growth.
“When interest rates go up, people’s demand is moderate or declining, so supply and demand can get a good balance. As people spend less, property prices will moderate. As rates increase, the dollar will strengthen,” he explained. “We don’t know if demand is going down. It’s a recession. We are slowing growth to bring demand into better balance with supply.”
Democratic US Senator Elizabeth Warren questioned the effectiveness of the Fed’s rate hike. Warren asked if the rate increase would help reduce food or gas prices. Powell admitted he doesn’t.
“You know what’s worse than high inflation with low unemployment?” Warren asked. “With millions of people out of work due to high inflation and recession … I think you are considering it before you drive the US economy off the cliff.”
According to Powell, the latest inflation figures suggest that the Fed needs to accelerate the rate hike to get to long-term neutral rate levels. The Fed sees rates between 3% and 3.5% in six months.
Asked about the price meltdown in the crypto space last week, Powell said he had not seen any significant macroeconomic effects. “The key implication is that in this very innovative new space, a better regulatory framework is needed … Many digital products are the same products that exist in the financial markets but are not regulated,” he said.
Powell also likened StableCoins to an unregulated money market fund. “The world of StableCoins is new and does not have an appropriate regulatory plan for the purpose.”
He told US senators that Congress needs to clarify who has authority over crypto and stablecoin. “The Fed controls and oversees banks. We talk about what the Fed’s regulated banks do with crypto assets on their balance sheets,” Powell added.
Throughout Powell’s testimony, gold was able to hold the $ 1,840 ounce level and at one point traded near daily highs. August Comex gold futures ended at $ 1,840.60, up 0.10% on the day.
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