Powell says the US economy can handle the coming additional rate hikes

Federal Reserve Chair Jerome Powell on Wednesday lashed out at economists who argue that aggressive rate hikes by the Fed have increased the likelihood of a recession or a hard landing for the US economy.

“The American economy is very strong and well positioned to deal with tighter monetary policy,” Powell said in a remark prepared for a Senate Banking Committee hearing. He said gross domestic product has recovered from a weak first quarter and consumer spending remains strong.

Powell told lawmakers that the central bank was committed to bringing down inflation and that more rate hikes were on the horizon. He said that only the size of the upcoming moves has not yet been decided.

“We assume ongoing rate increases will be appropriate; The pace of these changes will continue to depend on incoming data and the evolving outlook for the economy,” Powell said.

“We will make our decisions session by session and continue to communicate our thoughts as clearly as possible,” he added.

The Fed has already raised interest rates by 1.5 percentage points since March, the fastest pace in decades, as it seeks to quickly return monetary policy to more normal levels after two years of extremely low near-zero levels to support the economy during the pandemic.

Powell signaled last week that the Fed would choose between a 50 or 75 basis point move at its July 26-27 meeting. That would bring the policy rate close to 3%.

Forecasts released last week show that Fed officials’ median forecast sees interest rates peaking just below 4% next year, although some officials expect rates to rise above that level.

Powell told lawmakers that inflation caught the central bank by surprise.

“More surprises could be in store,” he said.

“Aggregate demand is strong, supply constraints have been larger and longer than expected, and price pressures have spread to a wide range of goods and services,” Powell said.

“The rise in the price of crude oil and other commodities as a result of the Russian invasion of Ukraine is pushing up gasoline and fuel prices and creating additional upward pressure on inflation,” he added.

Measured by the Fed’s preferred measure, the personal consumption price index, headline inflation is at an annual rate of 6.3% in April, while core inflation, which excludes volatile food and energy prices, is up 4.9% .

Powell said leading indicators show that core inflation “probably held at this pace or eased slightly” in May. The government will release the May PCE data on June 30th.

“We have both the tools we need and the determination it takes to restore price stability on behalf of American families and businesses,” Powell said.

US Stocks DJIA,

opened lower on Wednesday after strong gains in the previous trading session.

The yield of the 10-year Treasury note TMUBMUSD10Y,
dropped to 3.19%. Powell says the US economy can handle the coming additional rate hikes

Brian Lowry

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