Powell pledges to bring down inflation during confirmation hearing

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Inflation dominated questioning at Federal Reserve Chairman Jerome Powell’s hearing on Tuesday for confirmation for a second term.

Powell, who was renominated by President Joe Biden to lead the Fed, said that the central bank is prepared to tackle inflation by hiking interest rates and that the economy is now in good enough shape for pandemic-related stimulus to be pared back. He said that the Fed is prepared for the possibility that inflation proves stickier than presumed.

“Our policy has been adapting to this for some months, but … if inflation going to last longer, then that would potentially imply more risk of its persistence and ultimately becoming entrenched, and our policy will respond accordingly,” Powell said, adding that he predicts high inflation will likely persist at least through the middle of this year.

The chairman, who was first appointed by former President Donald Trump, was further asked that if inflation were to persist over the next three or four months at a range between 5% and 7% and if the unemployment rate were to remain steady, what specific tools the Fed would use to rein it in.

WHAT TO EXPECT WHEN THE FEDERAL RESERVE HIKES INTEREST RATES

“I would expect this year, 2022, will be a year in which we take steps toward normalization. That will involve raising the federal funds rate, that will involve ending asset purchases in March and perhaps later this year, depending on the run of things, we would also see ourselves beginning to allow the balance sheet to shrink,” Powell said.

The last time the Fed hiked interest rates was in 2018, after which it began incrementally reducing rates. In 2020, central bank officials dropped the federal funds rate to near-zero at the outset of the COVID-19 pandemic and have kept them at that level since then. Now, Fed officials expect a series of rate hikes in the coming months and years, the first of which could come in March.

Powell pointed out during the hearing that all members of the Federal Open Market Committee foresee interest rate going up this year, with the median projection being three 25-basis-point hikes.

While some Democrats are concerned that aggressively hiking interest rates this year could hamper the country’s economic stability as it emerges from the pandemic, some Republicans think that the Fed has not been moving aggressively enough in the face of high inflation and have applauded the central bank’s recent tack of being a bit more hawkish.

“I’m relieved the Fed has acknowledged inflation is running well above and longer than its initial projections,” said Sen. Pat Toomey of Pennsylvania, the ranking member of the Banking Committee. “But I remain concerned with the Fed’s actions going forward. First, I worry that this has become the new normal for the Fed’s monetary policy. We’re more than a year into record economic expansion, with unemployment at near all-time lows, and yet the Fed is still buying government and agency securities.”

Consumer prices increased 6.8% for the year ending November — the fastest pace of inflation in 39 years. The new, highly anticipated inflation numbers will be released on Wednesday and are expected to show that inflation grew at a whopping 7% year-over-year rate last month.

Powell is very likely to win renomination to his position given that he enjoys broad bipartisan support in the Senate.

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Democrats have cheered him for making full employment a priority and for keeping the central bank independent. Sen. Jon Tester, a centrist Democrat from Montana, highlighted Powell’s efforts to insulate the Fed from politicization under Trump.

Republicans largely see Powell as levelheaded in his decision-making and are pleased that Biden didn’t pick a more liberal head for the central bank, which he was weighing in potentially nominating Lael Brainard, now the president’s nominee for vice chairwoman of the Fed. Brainard’s confirmation hearing is on Thursday and is expected to be more contentious.

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