Fed Chair Powell warns there is ‘a long way to go’ to tame inflation

The battle against inflation is not won. U.S. Federal Reserve Chair Jerome Powell warned Wednesday in his appearance before a House committee that there is “a long way to go” to get inflation, currently at 4%, down to 2%, the central bank’s price stability target. Powell made it clear from his opening remarks that he expects interest rates to rise further, even though he considered it “prudent” to pause last week after ten consecutive hikes.

In his biannual appearance before Congress (this Wednesday in the House of Representatives and Thursday in the Senate), Powell reiterated what he said after the last meeting of the Fed’s monetary policy committee last week. “Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,” he said.

“Nearly all FOMC [Federal Open Market Committee, in charge of monetary policy] participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy,” Powell said during his remarks.

The Federal Reserve Chair believes that the economy faces headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring and inflation.

Powell stressed that inflation remains at 4%, well above the long-term target of 2%, and that labor market conditions remain very tight. He recalls that the central bank has raised the policy interest rate by five percentage points since early last year. “We have been seeing the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation,” he explained.

The forecasts point to interest rates rising further, by half a point to 5.5%-5.75% by the end of the year, although Powell insisted that those decisions will be made on a meeting-by-meeting basis.

“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run,” he said.

Wednesday’s hearing was the first time Powell appeared before Congress since the banking storm that engulfed Silicon Valley Bank, Signature Bank and First Republic Bank. After the banking turmoil, it was the central bank’s Vice Chair for Supervision who appeared before lawmakers and acknowledged mistakes made by the central bank with regulation and supervision.

Now, however, it is Powell’s turn to explain himself. Some members of Congress have been very aggressive and critical of his decisions, and he must now face their questions during his two-day testimony.

During his opening remarks, the Fed chair also referred to financial stability. “The U.S. banking system is sound and resilient,” he said. “The recent bank failures, including the failure of Silicon Valley Bank, and the resulting banking stress have highlighted the importance of ensuring we have the appropriate rules and supervisory practices for banks of this size. We are committed to addressing these vulnerabilities to make for a stronger and more resilient banking system,” he added.

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