If measures of the US economy keep heating up, as they did in January, the Federal Reserve will have to raise interest rates even higher than already indicated – and keep them there for a long time – Chair Jerome Powell warned in testimony Congress will be given on Tuesday.
Powell’s first appearance before Congress in nine months coincides with recent signs that the economy remains resilient and inflation is still very high. Over the past year, the Fed has raised its benchmark interest rate at the fastest pace in four decades to nearly 4.6%, its highest level in 15 years. But consumer spending, hiring, and growth haven’t cooled down yet.
Several Fed officials said last week that they would support raising the Fed’s key rate above the 5.1% level expected in December if growth and inflation continue to rise. When the Fed raises its key rate, it typically makes mortgages, auto loans, credit card rates, and business lending more expensive. It’s a trend that can slow spending and inflation but also carries the risk of sending the economy into recession.
In his two days of semi-annual testimony to Congress – Powell will address the House Financial Services Committee on Wednesday – the Fed chair will have to navigate a treacherous path: He will likely be pressured by Democrats to ever borrow more. The economy is headed for a recession and Republicans who have urged the Fed to act aggressively to slow price acceleration.
Inflation, measured year-on-year, has eased to 6.4% from its peak of 9.1% in June. But its progress stalled in January: The Fed’s preferred rate hike rose by the most in seven months from December to January.
Powell notes that so far, most of the slowdown in inflation reflects a deregulation of supply chains that have brought more furniture, clothing, semiconductors, and other physical goods into the U.S. and allowed access to the coast. In contrast, inflationary pressures persist in many sectors of the vast services sector of the economy.
Rent and housing costs, for example, remain an important driver of inflation. At the same time, the cost of leasing a new apartment is rising at a very slow rate, a trend that will underpin housing inflation by mid-year, Powell has said.
But the prices of many services – from food to hotel rooms to haircuts – are still rising sharply, with little sign that the Fed’s rate hike is having an effect. Fed officials say the cost of those services mainly reflects rising wages and salaries, which companies often pass on to their customers in the form of higher prices.
As a result, the Fed’s monetary policy report to Congress, which it publishes along with the chairman’s testimony, said that reducing inflation would require “softer labor market conditions”—a call for fewer job openings and more layoffs. Recipe.