The commitment of Federal Reserve of reining in inflation to 40-year highs is “unconditional” but also comes with the risk of higher unemployment, the central bank chief said on Thursday. Jerome Powell.
“It’s unconditional,” Powell told the Financial Services Commission of the House of Representatives when asked about the Fed’s commitment to combat inflation which, according to the central bank’s preferred measure, triples its 2 percent target.
“We really need to restore price stability…because without that we won’t be able to have a sustained period of maximum employment where the benefits are widely distributed,” he said. “It’s something we have to do, we must do.”
Powell’s testimony marked the second day in a row that congressional lawmakers grilled him about the Fed’s effort to rein in inflation, which is fueling fears of a sharp economic slowdown or recession and a sharp rise in unemployment.
On Wednesday, Powell told the Senate Banking Committee that the Fed was not trying to provoke a recession, although “it was certainly a possibility” with recent global events out of its control, making it more difficult to control price pressures without inducing a drop in activity.
Questioned by members of the House panel on Thursday, Powell said there was a risk that the Fed’s actions could lead to rising unemployment. The country’s unemployment rate stood at 3.6% in May.
“We don’t have precision tools,” he said, “so there is a risk that unemployment will go up, from what is historically low. A labor market with 4.1% or 4.3% unemployment is still a very strong labor market.” .
At the same time, however, Powell said he expects economic growth to pick up in the second half of the year after a slow start in 2022.
Price pressures have continued to mount for months, forcing the Fed to step up tightening in financial conditions in a bid to cool demand, while some supply chain issues are expected to begin to be resolved in the coming months. months.
Last week, the Fed raised its benchmark overnight rate by three-quarters of a percentage point, its biggest hike since 1994, to a range of 1.50% to 1.75%, and signaled the cost of credit would hit 3.4%. at the end of this year.
Powell also said the central bank will most likely need to raise rates by 50 or 75 basis points at its next meeting in July, and other Fed officials have since lined up to back the new aggressive stance of bringing rates to a slightly restrictive territory in the short term.
Economists polled by Reuters this week forecast the Fed would offer another 75 basis point rate hike in July, followed by a half percentage point hike in September, not returning to quarter percentage point moves until November in the estimate. closest.
There are already some tentative signs of weakening in a still red-hot job market, with claims for jobless benefits stable since falling to a more than 53-year low in March.