Summary: Federal Reserve Chairman Jerome Powell argued Wednesday that the U.S. economy can handle a tighter monteary policy, as he spoke in front of congressional lawmakers Wednesday.  The chairman also emphasized tthat he and the Fed are determined to bring down inflation while maintaining a strong labor force.  “At the Fed, we understand the hardship high inflation ...

Federal Reserve Chairman Jerome Powell argued Wednesday that the U.S. economy can handle a tighter monteary policy, as he spoke in front of congressional lawmakers Wednesday. 

The chairman also emphasized tthat he and the Fed are determined to bring down inflation while maintaining a strong labor force. 

“At the Fed, we understand the hardship high inflation is causing,” the Chairman said. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”

In order to accomplish the feat, Powell said that the Fed plans to eventually raise interest rates to a “neutral level” of 2.5% and perhaps beyond that number to a “modestly restrictive level.” 

“We estimate that the longer-run neutral level of the federal funds rate to be around 2.5%,” said Powell. “And actually we think it will be appropriate to raise rates above a neutral level into a modestly restrictive level. This is very high inflation and it’s hurting everybody.” 

Powell also mentioned that while that is their target number, it ultimately depends on the data coming in, leaving room for strategic adjustments. 

Powell noted that the war in Ukraine and Covid-related shutdowns in China are adding to inflation, and that many global economies are experiencing similar interest rates. 

Powell’s remarks are part of a congressionally mandated biannual report titled Monetary Policy Report, which aims to provide updates to Congress and Americans about current affairs regarding the economy. That report was published last week and Wednesday Powell essentially presented that report to Congress along with addressing questions lawmakers had.  

Over the past three meetings, the central bank has increased rates a total of 150 basis points, equivalent to 1.5%, in an effort to combat inflation, which is increasing at a rate Americans haven’t seen in 40 years. That culminated in the last meeting’s increase of 75 basis points (0.75%), making it the largest increase since 1994. 

Sen. Elizabeth Warren (D-Mass.) warned the chairman that continuing to increase the federal fund rate could put the economy in a recession. 

“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.

Some republican senators focused their attention and questions on whether or not the White House can shift their policies, such as regulations on the energy industry, to better mitigate inflation and the subsequent effects. They advocated that instead of trying to decrease the demand, the White House can help to increase supply by bringing down regulations. 

While Powell acknowledged their claims and slightly agreed that reducing regulations will always help to increase supply, he reiterated that that’s not his goal at the Fed. 

While Powell believes that higher interest rates will bring down inflation as a whole, he noted that they will not necessarily help Americans at the pump or in grocery stores. Those costs could stay the same for awhile and slowly start to decrease over time. 

Last meeting, the Fed projected another 0.75% increase in their next meeting in July. In a recent statement, Powell said, "From the perspective of today, either a 50 basis point or a 75 basis point increase seems most likely at our next meeting."

Most Fed officials estimated the rate would increase to 3.4% by the end of this year and to 3.8% in 2023. This would be a substantial shift from projections in March that saw the rate rising to 1.9% this year.

All eyes will be on the next two-day meeting taking place on July 26 and 27. 

Author: Tyler Irvin