Federal Reserve Chairman Jerome Powell has battled a president who has threatened to remove him, a once-in-a-century economic meltdown, the uncertainty caused by COVID-19 and the high inflation that spurred him during his first term as central bank lead.
And his second term does not seem easier.
After a resounding vote of confidence from the Senate, Powell’s next challenge may be the toughest since taking over the central bank in 2018: to lead a successful effort to curb inflation without derailing a robust economy.
Powell said in an interview Friday with Marketplace, his first since the Senate voted 80-19 in favor of his confirmation Thursday.
The Fed aims for annual inflation of 2 percent as measured by its personal consumption expenditures price index, a third of the annual increase of 6.6 percent in March.
“We will do that,” he said. But Powell warned that the process of lowering inflation to 2 percent “will also involve some pain”.
The Fed’s ultimate goal is to raise interest rates fast enough to slow consumer and business spending. As households and businesses face higher borrowing costs, they are less likely to spend money on goods and services that are in high demand. The resulting decrease in demand is supposed to stabilize prices in theory, with more buyers willing to purchase goods and services at lower prices throughout the year.
“If we’ve had the recovery that we’ve had, and we’ve had to put up with a few years of high inflation, but then it’s back to business as usual, then maybe at some point, future historians will say, ‘Well, it was,’ said David Beckworth, a senior research fellow at the Mercatos Center Affiliated with George Mason University, a think-tank with liberal leanings, “a worthwhile trade-off.”
“Now, on the other hand, if we get to a future where inflation is unfettered and out of control, the Fed is going to look really bad and we will look at that point as a turning point,” he said.
Powell and the Fed took to action as the outbreak of the COVID-19 pandemic rocked the US economy in March 2020. The bank cut its policy rate band to near zero levels and bought trillions of dollars in bonds to keep money and credit flowing through the economy.
The Fed has also deployed billions of dollars in emergency loans, ramping up the emergency tools it last used to stem the blow of the Great Recession.
By many measures, the Fed’s response — aided by nearly $6 trillion in fiscal stimulus — has been a resounding success.
The unemployment rate fell from 14.7% in April 2020 to 3.6% last month, just 0.1 percentage point higher than the pre-pandemic level. The US has restored all but 1.2 million jobs lost during the pandemic, with a record 6.5 million added in 2021 alone.
But the rapid recovery of the economy came with rising inflation that now threatens to undo the economic gains the Fed helped bolster.
The annual inflation rate was 8.3 percent in April, according to the Labor Department’s Consumer Price Index, slightly down from March’s annual rate of 8.5 percent. While general inflation may already have peaked, prices for food, transportation, shelter and health care have been rising at a faster pace month on month.
Top Fed officials, along with dozens of economists, believe inflation will subside last year as pandemic-driven supply chains unravel, fiscal stimulus wears off, and workers return to the workforce in greater numbers. Powell said throughout 2021 that the Fed would be patient in withdrawing its bond purchases and raising interest rates, lest they interrupt a quick recovery.
“There were two issues, I think, mainly related to the pandemic itself and the way he used it to change the usual indicators that made it difficult for the Fed to read the economy,” former Fed Chairman Ben Bernanke said on Monday. Interview on CNBC.
“The Fed thought in mid-2021 that these factors were likely to resolve themselves over time — in other words, supply shocks were called transient and so… they didn’t need to respond to the early stages of inflation because they would have gone away on their own. Proven That is wrong.”
Powell and the Federal Reserve now have to quickly raise interest rates toward the level that would slow the economy’s growth, and potentially higher, in order to slow the rate of price hikes. The Fed chief has made clear that the bank will do whatever it takes to stem inflation, which some economists fear could mean raising interest rates to a level likely to cause a recession.
The Fed can fight inflation by reducing demand for goods, which means making it too costly for many households and businesses to maintain their current spending habits. The bank hopes that between a combination of actual price hikes and hints toward future hikes, banks and lenders will raise interest rates enough on their own to slow the economy to a more sustainable pace.
“The market is doing the heavy lifting, because it is convinced that the Fed will follow through and do whatever is necessary to bring down inflation,” said Beckworth of the Mercatos Center. He added that Treasury yields, which influence interest rates on mortgages and auto loans, have already risen significantly since the Fed started rising in March.
However, a rate hike by the Federal Reserve will do little to help lift COVID-19-related factory and port shutdowns in China or end the war in Ukraine’s severe shock to global food and energy supplies — both of which are set to push inflation higher. The combination of higher interest rates and steady price growth may be enough to slow a robust economy into much deeper pain.
“This is not the kind of scenario where we see a price hike that monetary policy is set up to counter,” said Michael Mitchell, director of research and policy at Groundwork Collaborative, a progressive nonprofit think tank.
“By going forward with higher interest rates right now, they are actually condemning a lot of people, a lot of workers and families to greater costs and more difficulty making ends meet.”