Powell hammers home ‘unconditional’ commitment to cool prices

Federal Reserve Chair Jerome Powell called his commitment to curbing inflation “unconditional” and another of his colleagues backed raising interest rates by 75 basis points again next month, even as Democrats warned him against triggering a recession.

“We have a labor market that is sort of unsustainably hot and we’re very far from our inflation target,” Powell told the House Financial Services Committee Thursday during his second day of semiannual congressional testimony. “We really need to restore price stability, get inflation back down to 2%, because without that we’re not going to be able to have a sustained period of maximum employment.”

Policy makers raised interest rates by 75 basis points last week and Powell signaled that another move of that size — or a 50 basis-point increase — was on the table when they meet again in late July. Fed Governor Michelle Bowman separately told bankers in Massachusetts that she backed raising rates by 75 basis points next month and continuing with hikes of at least 50 basis points after that until price pressures cooled.

Her comments followed a speech by Governor Christopher Waller on Saturday in which he said that he would support another 75 basis point move in July. Other officials, including Minneapolis Fed President Neel Kashkari and Chicago’s Charles Evans — who have previously been on the dovish wing of the US central bank — have also suggested that a move of that size was reasonable to debate next month.

Powell and his colleagues have pivoted aggressively to fight the hottest inflation in 40 years amid criticism that they left monetary policy too easy for too long as the economy recovered from Covid-19. They’ve raised rates by 1.5 percentage points this year and officials forecast about 1.75 points of further cumulative tightening in 2022.

The shift has rocked financial markets as investors fret the Fed could trigger a recession. Powell told lawmakers Wednesday that such an outcome was “certainly a possibility,” though not something the Fed is aiming for or believes is necessary to reduce inflation to the central bank’s 2% goal.

Powell repeated that the Fed was still hoping to achieve a soft landing, while acknowledging that it was going to be tough.

“That has become significantly more challenging with the events of the past few months, particularly the war which is driving gas prices up,” he told the House panel. “We don’t think that a recession is inevitable.”

Surging prices have infuriated Americans and harmed the standing of President Joe Biden’s Democrats with voters ahead of November congressional elections.

Consumer prices rose 8.6% last month from a year ago, according to the Labor Department. June CPI data will be published July 13, two weeks before the Fed commences its next meeting. The central bank targets a separate gauge from the Commerce Department, which is released with a lag and was running more than three times faster than the Fed’s 2% goal, according to its latest reading.

Powell mainly heard support for the Fed’s hawkish stance from Republicans while Democrats argued that raising rates would not make any difference to high gas or food prices, but it could push millions of Americans out of work.

The Fed chief said it was possible to reduce inflation without hurting the labor market and the goal was to ease demand, not cause unemployment.

“Our tools are blunt but they are the right tools to deal with broad aggregate demand,” he said.

— By Jonnelle Marte and Steve Matthews (Bloomberg)

— With assistance from Craig Torres, Matthew Boesler and Diego Areas Munhoz (Bloomberg)