December 2, 2023

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Powell says he sees a path in which inflation subsides without significant job losses

Powell says he sees a path in which inflation subsides without significant job losses

Federal Reserve Chairman Jerome Powell said on Thursday that it is possible for inflation to subside in the United States without a significant increase in the unemployment rate.

At a Senate Banking Committee hearing, Sen. Tina Smith, R-North Dakota, asked Powell if he sees “a path for inflation to continue decelerating without seeing massive job losses and harm to middle-class families?” Powell replied, “I do.”

Powell said the job market is gradually cooling down and that’s what we’d like to see.

The biggest surprise to the US economy this year, economists say, has been the continued strength of the labor market despite the Federal Reserve’s rapid pace of interest rate hikes over the past 15 months.

On the other hand, economists say that the resilience of the labor market means that the Fed’s tightening of monetary policy will lead to a “soft landing” or a “moderate recession” for the economy.

But other economists worry that a strong labor market could eventually make it difficult to reach the central bank’s 2% target.

Jason Furman, an economist at Harvard University, told the New York Times that there is a “bad scenario” where the unemployment rate would need to rise to close to 10% to get inflation back on target.

The unemployment rate is now 3.7% and Federal Reserve officials expect it to rise to 4.5% by the end of 2024.

Senate Democrats said they support the Federal Reserve’s decision to keep interest rates steady after raising interest rates at every meeting since last March.

“For many of us who worry that interest rate hikes will do more harm than good, this is good news,” said Senator Sherrod Brown, D-Ohio and chairman of the Banking Committee.

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Powell has said several times that the “strong majority” of Fed officials believe the Fed will raise interest rates twice more by 25 basis points by the end of the year. This will raise the Fed rate to the range of 5.5%-5.75%.

Responding to the senators’ concerns, Powell said the Fed is “trying to avoid the mistake of going too far.”

“It just makes sense that we move at a precise pace,” Powell added.

Regarding the banking sector, Powell said the Fed is working with smaller banks that focus on commercial real estate loans.

“We’re working with the banks to work our way through this,” Powell said.

The rapid collapse of the Silicon Valley bank earlier in March highlighted the banks’ potentially painful losses from the trillions of dollars in commercial real estate loans on their books. Office building ratings have fallen sharply as many Americans continue to work from home.

Senate Republicans have argued that the Fed’s plans to raise capital standards on banks in the wake of bank failures this spring will hurt the banking sector and lead to less corporate lending.

“My question is how much is it? And when is it enough? The higher the capital standards, the lower the capital for the private sector, which means less loans and less capital for those who are actually creating jobs,” said Sen. Tim Scott, the ranking Republican on the Banking Committee.

Powell said the Fed has not yet finished working on its plan to increase the bank’s capital. He said he did not expect the final version to raise capital standards for banks with assets of less than $100 billion.

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Sen. Elizabeth Warren, Democrat of Massachusetts, said she didn’t think Powell was sufficiently responsible for the series of bank failures earlier this year.

In a difficult exchange, Powell said he was focused on learning the right lessons so that there is no repeat of a major bank failure that spreads infection through the banking system.

“My focus is on moving forward,” Powell said.

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