Federal Reserve Chairmen Jerome Powell testifies before the Senate: What did he say?
Chairmen Powell testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. What did he say about the economy and interest rates?
Chairmen Jerome Powell took a trip down to Capitol Hill this morning to testify before the Committee on Banking, Housing, and Urban Affairs, where he affirmed the Federal Reserve’s commitment to keeping inflation under two percent.
“Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do,” said Chairmen Powell during his opening remarks.
The Chairmen also confirmed that the Federal Reserve officials expect to raise higher rates than they had previously estimated.
Chairmen Powell defends the Federal Reserve’s decision to increase interest rates
When asked by Senator Sherrod Brown (D-OH) if the Federal Reserve was treating the unique economic situation the US currently finds itself in like past crises, which risks implementing “solutions” that will not address the root causes of inflation, Chairmen Powell responded that the Federal Reserve has “been aware since the beginning [...] that they are some differences this time.” For example, record inflation has been paired with record-low unemployment and one of the most dramatic supply chain breakdowns in industrial history caused by the pandemic.
However, the Chairmen also see similarities in that the driver of inflation is a “mismatch between supply and demand.” Chairmen Powell cited record low unemployment, the number of available jobs for each unemployed person, and the rapid increases in housing prices, as data points that the Fed sees as justification to use their tools to align supply and demand. He also recognized the limited nature of their tools and acknowledged that they might be unable to target some of the root causes of inflation. Nevertheless, if demand falls, prices are likely to follow, even if the prices of some goods and services remain high.
South Dakota Senator Mike Rounds asked Chairmen Powell if he felt that the Federal Reserve has the tools to lower inflation, given the policy priorities of the Biden administration. Chairmen Powell responded that it was not his purpose to blame a certain party for inflation and emphasized that the Fed’s tools work to moderate demand, which, as mentioned above, works to decrease inflation regardless of the cause.
The relationship between rate increases and unemployment
Chairmen Powell also noted in his opening remarks that the Fed remains focused on its “dual mandate to promote maximum employment and stable prices.”
Senator John Kennedy (R-LA) asked the Fed’s leader about the tensions between this mandate and asked the Chairmen to comment on the historical record showing that unemployment has increased to bring inflation back under two percent. When asked if his actions to reduce demand meant that the Federal Reserve was trying to increase unemployment, Chairmen Powell replied that they are “trying to realign supply and demand.” Senator Kennedy then went on to ask if Congress enacting fiscal policy that lowers government spending would reduce the “people you’re gonna have to put out of work,” the Chairmen responded, “it could work out that way.”
Later in the session, however, Chairmen Powell made sure to clarify that the country’s debt is not the problem; rather, it is the “path where the debt is going [because it is] growing substantially faster than the economy.” But if government spending, which could be debt-financed, generated greater growth in the economy, that trend could be altered.
Standoff with Senator Elizabeth Warren
The tensions between the Fed’s duel mandate were raised again by Senator Elizabeth Warren (D-MA), who called attention to the central bank’s own report that two million people could lose their jobs by the end of the year. Senator Warren asked the Chairmen to speak directly to those who could lose their job as a result of rate increases.
“I would explain to people more broadly that inflation is extremely high, and it hurting the working people of this country badly. All of them, not just the two million of them, but all of them are suffering under high inflation, and we are taking the only measures we have to bring down inflation,” said Chairmen Powell defending the Federal Reserve’s actions.
“And putting two million people out of work is just part of the cost. They just have to bear it?” retorted Senator Warren.
Chairmen Powell made two final comments during the standoff. The first highlighted the limited tools available to the Federal Reserve, rate hikes being the most powerful. The second defended the Fed’s actions, saying that even if two million people were ripped from the labor market, the 4.5 percent figure would be “better than most of the time for the last seventy-five years.”
The Senator was not appeased with this answer and reminded the Chairmen that two million workers might not care about government statistics when they struggle to keep food on the table and a roof over their heads.
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