With inflation still excessive in the United States, most Federal Reserve officials expect to raise interest rates again this year, Chairman Jerome Powell told a House committee on Wednesday.
“Inflationary pressures remain elevated and there is still a long way to go to bring inflation back to 2%,” Powell said at the first of two days of the semi-annual hearing on Capitol Hill.
Still, the Fed left interest rates unchanged last week after 10 straight hikes, so it might take time to gauge how higher lending rates have affected the economy, Powell said.
The contrast between the Fed’s stated concerns about still-high inflation and its decision not to hike rates has increased uncertainty about its next move.
The blurrier messages suggest Powell is trying to balance the competing demands of those Fed officials who want to keep raising rates and others who think the central bank has done enough.
Asked Wednesday to clarify last week’s messages, Powell told the House Financial Services Committee that keeping interest rates on hold is consistent with the Fed’s increasing focus: slowing the pace of its rate hikes to avoid rates going higher than needed to be raised to bring inflation down and risk causing a deep recession.
“It may make sense to raise rates, but at a more moderate pace,” Powell said, comparing the Fed’s rate hikes to a trip. “The closer you get to your goal, the more you try to find that goal, the slower you become.”
Particular disagreements over Fed policy emerged at the hearing. Rep. Patrick McHenry, the North Carolina Republican and chairman of the committee, said the Fed “must continue to work to eliminate this secret tax on American workers and families,” citing inflation. “And I urge you to continue that resolve.”
But California Rep. Maxine Waters, the senior Democrat on the panel, said, “The Fed made the right decision to suspend interest rate hikes.”
In his comments on Wednesday, Powell also noted that the Fed decided last week to leave interest rates unchanged in order to assess the impact on the banking sector of this spring’s failures of three major banks and to determine whether the failures are the Reducing credit to consumers and businesses would slow the economy.
Though the Fed is focused on fighting inflation, Republican committee members spent more time Wednesday questioning Powell about the central bank’s stance on banking regulation. McHenry suggested that Congress should consider removing the Fed’s powers to regulate banks if policymakers take an overly strict approach to policing small and medium-sized lenders and potentially weaken lending.
In the wake of this year’s bank failures, Michael Barr, the Fed’s chief financial regulator, indicated that the central bank might consider raising the level of capital banks are required to hold against potential losses to limit further failures.
However, some Republicans on the committee argued Wednesday that requiring banks to hold more funds in reserve would limit their ability to lend. They warned that small companies would be particularly hard hit, as they rely more on bank loans than large companies, which can issue their own bonds. Less lending, they claimed, would weaken the economy.
Powell responded that any new such rules would likely focus on the largest US banks — those with more than $100 billion in assets, like Silicon Valley Bank and the other two institutions that failed. In contrast, community banks typically have less than $10 billion in assets.
The Fed chair also said it could take several years for such rules to take effect. At the same time, he emphasized that there is always a trade-off between requiring banks to hold certain reserves and encouraging lending. The challenge is finding the right balance, he said.
With inflation still well above the Fed’s 2% target, most economists believe they are assuming a rate hike at the next meeting in late July is all but certain. What action the central bank might take afterwards remains far from clear. Policymakers said last week that they expect to hike rates twice more this year. However, if economic data suggests that inflation will quickly fall back to target levels, they may not do so.
At a news conference last week, Powell said there were no plans to hike rates every other meeting or to any other specific time frame. Instead, as he reiterated on Wednesday, Fed officials will monitor economic data and make their rate decisions “meeting-by-meeting.”
The central bank’s rate hike streak has peaked Borrowing for Consumers and businesses are becoming more expensive on a range of loans, including home and auto loans, credit cards and business loans. The aim was to cool inflation by slowing spending and hiring.
Over the past year, the Fed has raised interest rates rapidly, including four times by three-quarters of a point. Now that year-on-year inflation has eased to 4% from 9.1% a year ago, Powell has indicated the Fed plans to move much more slowly.
A slower pace of rate hikes, Powell said, could help the Fed accomplish a difficult task: weakening the economy enough to contain inflation without undermining it enough to cause a deep recession.
But on Wednesday, Powell reiterated a warning he’d uttered many times before: Fighting inflation won’t be painless.
“Reducing inflation will likely require a period of below-trend growth and some weakening of labor market conditions,” he said.
“Softer labor market conditions” would include rising layoffs and a higher unemployment rate. However, Fed officials have said they hope to stem inflation primarily by reducing job vacancies rather than mass layoffs.
Lower demand for labor would allow employers to slow wage increases, helping to curb inflation.
Last week, 12 of the Fed’s 18 policymakers said they were considering at least two more rate hikes this year, and four predicted one more. Only two officials predict that the central bank will keep interest rates at the current level of 5.1% until the end of the year.