Federal Reserve Chair Jerome Powell testified in Congress on June 22 that the central bank remains determined to keep hiking interest rates high enough to cool the red-hot inflation, acknowledging that recession is "certainly a possibility" but insisting the American economy is robust enough to withstand tighter financial conditions.
Inflation 'Surprised to the Upside'In his testimony, Powell told lawmakers that the pace of future rate hikes would depend on how quickly inflation comes down as the monetary screws are tightened, with assessments made on a “meeting-by-meeting” basis.
"Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook," the Fed chief said, adding that markets had priced in a string of additional rate hikes, and "that is appropriate."
While the Fed's tightening of financial conditions can cool demand in a bid to ease price pressures, it's unable to address the supply side, where Powell said some of the factors lie behind the current bout of inflation.
"The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation," he said, adding that COVID-19 lockdowns in China were also contributing to supply chain disruptions.
Recession Possible but 'Not Our Intended Outcome'The Fed's commitment to fighting inflation by tightening monetary settings has driven concerns that the economy could tip into recession, with a number of investment banks in recent weeks boosting their predictions for the likelihood of a contraction.
But Powell insisted that the U.S. economy was well-poised to withstand the shock of higher rates.
"The American economy is very strong and well-positioned to handle tighter monetary policy," he said, pointing to what he described as an "extremely tight" labor market, with unemployment near a 50-year low, job vacancies at near-record high levels, and robust wage growth.
"Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong," he said, though he noted that business investment seemed to be slowing, and the housing market was softening.
Responding to a question on recession risk, Powell said it was "certainly a possibility," though "it's not our intended outcome."
During the testimony, Powell was asked by Sen. Elizabeth Warren (D-Mass.) whether the Fed's rate hikes would reduce gasoline and food prices.
'Off a Cliff'Warren expressed concern that tighter policies would push companies to cut costs and fire workers, and Powell responded that there were around two vacancies for each available worker in the economy and that part of the aim of the Fed's restrictive policies was "to bring the labor market back into balance."
Warren then said that, given the Fed's inability to have much of an impact on soaring food and energy prices, the rate hikes would likely drive millions of Americans out of work and weaken the economy—but inflation would stay high.
"I hope you reconsider that before you drive this economy off a cliff," the senator said.
"But that's because the #Fed will not hike rates enough and #Congress and @POTUS will not help out by reducing government spending and repealing regulations."
The Fed's next policy meeting is scheduled for July 26–27.