Elizabeth Warren to Fed Chair Jerome Powell: Don’t ‘take this economy off a cliff’

During a Senate Banking Committee hearing on Wednesday, Democratic Senator Elizabeth Warren urged Powell to proceed with rate hikes cautiously and avoid triggering a recession that costs millions of jobs.

Warren asked Powell if the Fed’s rate hikes would lower gas prices, which have hit record highs this month.

“I don’t think so,” Powell said.

Warren asked if food prices will fall because of the Fed’s war on inflation.

“I wouldn’t say that, no,” Powell said.

Warren expressed concern about the impact of the Fed’s rate hikes on households and the risk of recession.

“Rates will not make Vladimir Putin turn his tanks around and leave Ukraine,” Warren said, adding that they will not break corporate monopolies or stop Covid-19.

Warren said rate hikes, however, will increase borrowing costs for households and could cause job losses.

“Inflation is like a disease and the medicine has to be tailored to the specific problem, otherwise you can make things much worse,” Warren said. “Right now, the Fed has no control over the main drivers of rising prices, but the Fed could slow demand by laying off a lot of people and making families poorer.”

The Massachusetts Democrat urged Powell to proceed cautiously with further rate hikes.

“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,” Warren said. “I hope you consider this before you drive this economy over the edge.”

Senators on both sides of the aisle have tried to blame rising inflation on a number of factors, including the stimulus to the pandemic, wage growth and corporate price increases. However, Powell declined to comment on any of these politically heated issues.

“I’m really focused on what we can do, which is shrink our balance sheet and raise interest rates, align supply and demand and bring inflation down to 2%,” he said.

Fed vows to reduce high inflation

Powell acknowledged that the high cost of living is causing Main Street financial problems and expressed confidence that the US economy can weather this difficult period.

“At the Fed, we understand the difficulties that high inflation is causing,” Powell said in remarks prepared during the Senate Banking Committee hearing on Wednesday. “We are strongly committed to bringing inflation back down, and we are moving quickly to do so.”

Powell, whose comments echoed those he made at last week’s Fed meeting, said policymakers planned to continue raising interest rates to keep inflation in check. The Fed’s rate hike last week was the biggest since 1994.

“The US economy is very strong and well positioned to deal with tighter monetary policy,” the Fed chairman said.

Powell faces questions about why the Fed waited until March to raise interest rates and why it felt the need to accelerate the pace of rate hikes.

In his remarks, Powell noted that monetary policy requires recognition that the economy often evolves in “unexpected” ways. He said supply restrictions were “greater and more lasting” than anticipated and that the war in Ukraine had pushed up energy prices.

“Inflation obviously surprised positively last year, and more surprises may be in store,” Powell said. “So we need to be agile in responding to incoming data and evolving perspectives.”

Recession is ‘certainly a possibility’ but not the goal

Asked whether rate hikes could trigger a slowdown, Powell said it was “certainly a possibility” but stressed that it was not the Fed’s “intent”.

Powell admitted, however, that the stakes are rising.

“Frankly, the events of the last few months have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong job market,” Powell said.

The Fed chief later said he didn’t think a recession would be necessary to tame inflation.

“I don’t think we need to bring about a recession, but we think it’s absolutely essential to restore price stability, really for the benefit of the labor market as much as anything else,” he said.

House prices should finally start to stabilize

Powell, whose policies helped spark a historic housing boom, expects gains in home prices to slow because of rising mortgage rates.

He told lawmakers that the Fed’s aggressive interest rate hikes are already slowing the housing market, eating into demand for homes.

“House prices must stop rising at such remarkably rapid rates,” Powell said. “Since the start of the pandemic, we’ve had a very, very hot housing market across the country. As demand for real estate moderates… you should see prices stop rising.”

One of the reasons for the rise in home prices was extremely low borrowing costs and the Fed’s purchase of hundreds of billions of dollars in mortgage bonds.

While he expects prices to cool, Powell warned the Fed did not control home supply and said homebuilders had warned of supply constraints. “This is not something the Federal Reserve can do,” he said.

Another complication is that rising mortgage rates – which are rising at the fastest rate since 1987 – will hurt some people looking to buy homes.

“There’s some pain involved for people who pay higher mortgage rates,” Powell said. “Some people will be excluded from the mortgage market, but that’s what needs to happen if we’re going to get back to price stability, to a place where people’s wages aren’t consumed by inflation… The biggest pain would be if we allowed this high inflation continue.”

Additional reporting by Alicia Wallace

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