Inflation and rate hike put the US economy in the face of a hurricane

Federal Reserve Chairman Jerome Powell acknowledged that raising interest rates will not solve two of the biggest problems facing American households at the moment: high gas, commodity and strategic prices.

During a Senate Banking Committee hearing, Democratic Senator Elizabeth Warren Powell urged a cautious but cautious proceeding with interest rate hikes and avoid a recession that would cost millions of jobs. The expectations of analysts and investment banks indicate that the US economy is approaching a recession stage, especially in light of the inflation rate reaching the highest level in more than 40 years, which prompted the US Central Bank to take decisions to move interest rates to reach at the present time to the highest level in about three contracts.

During the session, Warren asked the US Federal Reserve chairman whether the Fed rate increases would reduce gas prices, which reached record levels in June, and Powell replied, “I don’t think so.”

Asked if commodity and strategic prices would fall due to the Fed’s war on inflation and the continued movement of interest rates, Powell said, “I wouldn’t say that, no.” Warren expressed concern about the impact of Fed rate hikes on households and the risk of a recession. She pointed out that “raising prices will not make (Russian President) Vladimir Putin turn his tank and leave Ukraine,” pointing out that raising interest rates will not lead to the dismantling of corporate monopolies or stop the spread of the Corona virus and its variants.

Raising the interest rate increases the cost of lending

Warren said raising interest rates would increase borrowing costs for households and could cause job losses. She pointed out that “inflation is like a disease and the medicine must be adapted to the specific problem, otherwise it may make things worse.” “Currently, the Fed does not control the main drivers of higher prices, but it can slow demand by expelling many people and making families poorer,” she said. She urged Powell to proceed, albeit very cautiously, in raising interest rates.

“Do you know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work,” she added. “I hope you think about that before you push this economy off the cliff,” she said.

Meanwhile, senators on both sides have sought to blame rising inflation on a variety of factors, including pandemic stimulus, wage growth and corporate price increases. However, the Fed Chairman refused to get involved in any of these hot political issues. “I’m focused on what we can do, which is shrink our balance sheet, raise interest rates, bring supply and demand back into line, and bring inflation back to 2 percent,” Powell said.

Federal Reserve vows to tame inflation

Powell expressed his confidence that the US economy can get through this difficult period. “At the Fed, we understand the difficulties that high inflation is causing…we are strongly committed to bringing inflation down again, and we are moving quickly to do so,” he said in prepared remarks during a Senate Banking Committee hearing. He explained that officials plan to continue raising interest rates to control inflation. The Fed’s rate hike last week was the biggest since 1994.

The Federal Reserve Chairman said, “The US economy is very strong and well-positioned to deal with tighter monetary policy.”

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Powell faces questions about why the Fed waited until March to raise interest rates, and why it felt the need to speed up rate hikes. He noted that monetary policy requires recognition that the economy often develops in “unpredictable” ways. He said supply constraints were “bigger and longer lasting” than expected, and that the war in Ukraine had driven up energy prices.

“Inflation has obviously surprised to the upside over the past year, and there could be other surprises in store…so we need to be smart in responding to incoming data and evolving forecasts,” Powell said.

When asked if raising interest rates could lead to a decline in inflation, Powell said that was “a possibility for sure”, but stressed that it was not the “intent” of the Fed. Powell acknowledged, though, that the stakes are rising. “Frankly, the events of the past few months have made it more difficult to achieve what we want, which is 2 percent inflation and a strong labor market,” he added.

Policies that harm those planning to buy homes

The Fed chair later said he did not believe a recession would be necessary to tame inflation. “I don’t think we’re going to need a recession, but we think it’s absolutely necessary to restore price stability, really for the good of the labor market like anything else,” he added. He continued, “House prices must be stable.”

Powell, whose policies helped bring about a historic housing boom in the US market, expected home price gains to fall due to higher mortgage rates. He told lawmakers that aggressive rate increases by the Federal Reserve were slowing the housing market, undermining demand for homes.

He added, “Housing prices should stop rising at such a remarkably rapid rate… Since the beginning of the pandemic, we’ve had a very hot housing market across the country… with housing demand moderating… You should see prices stop rising. Height”.

One reason for the rising house prices was lower borrowing costs and the Federal Reserve’s purchase of hundreds of billions of dollars in mortgage bonds. Although he expects prices to fall, Powell cautioned that the Fed does not control the amount of home supply. He said home builders have warned of supply restrictions. “It’s not something the Fed can do anything about,” he added.

Another complication is that rising mortgage rates – which are rising at the fastest pace since 1987 – will hurt some people who want to buy homes. “There is some pain involved for people who are paying higher mortgage rates,” Powell said. “Some people will be priced out of the mortgage market, but that is what ultimately has to happen if we are to return to price stability, to a place where People’s wages are not being eaten up by inflation…the biggest pain is if we allow this high inflation to continue.”