WASHINGTON (AP) – Chairman Jerome Powell on Tuesday underscored the Federal Reserve’s determination to continue raising interest rates until there is clear evidence of a steady fall in inflation – an effort with high rates that carries the risk of recession.
Raising the Fed’s benchmark short-term rate typically leads, in turn, to higher borrowing costs for consumers and businesses, including mortgages, car loans, and credit cards.
“We need to see inflation fall in a clear and convincing way,” Powell told the Wall Street Journal. “And we will continue to pursue until we see this.”
The Fed chairman, who was confirmed last week by the Senate for a second four-year term, suggested the Fed would consider raising rates even sooner if price increases are not moderate.
“What we need to see,” Powell said, “is clear and convincing evidence that inflationary pressures are easing and inflation is falling. And if we don’t see that, then we’ll have to think about moving more aggressively. If we see this, we can consider a slower pace. “
And he said the Fed “would not hesitate” to push its benchmark to a point that would slow the economy if necessary. It is unclear what this level may be, Fed officials tie it to about 2.5% to 3%, which is about three times the current setting.
Powell’s remarks on Tuesday followed other statements he made that showed the Fed was implementing a series of rate hikes that could be the fastest loan boost in more than 30 years.
At a meeting earlier this month, the Fed raised its key half-point rate – twice the usual increase – for the first time since 2000 to a range of 0.75% to 1%. And at a news conference after the meeting, Powell suggested that Fed officials would continue to raise the rate by half a point at both June and July meetings.
On Tuesday, the Fed chairman was not concerned about the sharp fall in the stock market over the past six weeks. This decline partly reflects Wall Street’s concern that the Fed’s efforts to contain inflation, which has reached a 40-year high, could weaken the economy so much as to provoke a recession. Stock prices also often fall as interest rates rise, boosting bond yields.
Asked if raising the Fed’s rate could disrupt financial markets without necessarily lowering inflation, Powell said, “I don’t see it.”
The interest rate or yield on two-year Treasury bonds has risen steadily since the beginning of the year, which Powell showed as a sign that Wall Street expects the Fed to continue to tighten lending. Such expectations should help slow down borrowing and spending as well as cool the economy.
“It was nice to see how the financial markets reacted in advance to the upcoming rate hikes,” Powell said. “That’s what we need.”
The broad S&P 500 market index fell about 15% from its peak in January. This is just under 20% of the decline marked by the bear market. However, many economists say Powell is unlikely to allow market failures to change the Fed’s path, given that inflation has soared to such a high level and is causing difficulties for millions of households.
“Markets are orderly, they are functioning,” Powell said. “There are a few volatile days and volatile markets, but so far I see we’ve had a pretty good time with that.”
The Fed chairman also suggested, more clearly than before, that the central bank’s efforts to reduce inflation could lead to some people losing their jobs, which would boost unemployment.
Powell said the Fed’s goal was to cool consumer and business costs and bring them into line with limited supply of goods and workers. This, in turn, should curb inflation.
The Fed hopes to achieve this, Powell said, while maintaining a strong labor market. But that doesn’t mean the unemployment rate will necessarily stay at 3.6% where it is now, he said.
“You would still have a pretty strong job market if unemployment went up by a few margins,” he said.
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