Committed to fight inflation but not trying to trigger recession: Fed chair

'It's essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,' Fed chair said at a hearing before US Senate Banking Committee

The Federal Reserve is "strongly committed" to bringing down inflation that is running at a 40-year high and policymakers are acting "expeditiously to do so" but are not trying to cause a recession in the process, U.S. central bank chief Jerome Powell said on Wednesday.

"It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all," Powell said at a hearing before the U.S. Senate Banking Committee, adding that the central bank in coming months will be looking for "compelling evidence" of slowing price pressures before it eases up on the interest rate increases it kicked off three months ago.

While those rate increases have caused financial conditions to tighten "significantly," it is not the Fed's aim to tip the economy into a recession to bring inflation to heel, Powell told lawmakers.

"We are not trying to provoke, and I don't think we will need to provoke, a recession," Powell said in response to a question from a committee member.

Inflation continues to run well above the Fed's targeted level of 2%. A gauge of price increases that excludes volatile food and energy costs may have flattened out or eased somewhat last month, Powell testified, but Russia's Ukraine invasion and COVID-19 lockdowns in China are putting continued upward pressure on inflation.

One week ago, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point - its biggest hike since 1994 - to a range of 1.50% to 1.75%, and signaled rates would rise another 1.75 percentage points this year.

That steep rate hike path, designed to slow the economy, has sparked widespread concern about a recession and a weakening of labor markets.

To the Senate committee on Wednesday, Powell pledged an "overarching focus" on bringing down inflation and reiterated that ongoing increases in the Fed's policy rate would be appropriate, with the exact pace dependent on the economic outlook.

"Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," he said, adding that policymakers would need to be "nimble" in response to the incoming data.
 

"The American economy is very strong and well positioned to handle tighter monetary policy," Powell said.

CHANGING ENVIRONMENT

Powell's remarks to the committee also showed just how much the inflation environment has changed in the three months since he delivered the first of his semi-annual reports to lawmakers.

At that time, he described inflation - which was running at 6% a year by the Fed's preferred measure - as "likely to decline over the course of the year."

Little sign of that has emerged since those remarks, despite 150 basis points of rate hikes so far this year and more to come.

In an indication of how inflation has emerged as a thorny political issue that threatens to tip the balance of power in Congress to Republicans in elections this November, Powell found himself under fire from both the left and right.

Senator Elizabeth Warren, a Democrat representing Massachusetts, for one, took the Fed to task for pushing through rate hikes that raised the risk of a recession that could put millions out of work.

Republican Senator John Kennedy of Louisiana, in one of the more heated criticisms of the Fed's response to inflation, said inflation was hitting his constituents "so hard they are coughing up bones."

Republican Senator Thom Tillis of North Carolina, meanwhile, chided Powell for not lifting rates sooner even though a number of well-known monetary policy rules would have triggered such a move had the Fed followed them.

The Fed has never used policy rules "in a big way," Powell answered, adding that the central bank's policy rate is likely by the end of this year to be near the level prescribed by one of the more popular ones - the Taylor Rule.

The median projection among Fed policymakers released last week showed they expect the target rate to rise to 3.4% by the end of the year.

Overall, Powell did not stray far from his remarks in a June 15 news conference that followed the end of the Fed's latest policy meeting, but his assertion that financial conditions had "tightened significantly" in his prepared statement to the committee "seems significant and may herald a slower pace of rate hikes ahead," Karim Basta, chief economist at III Capital Management, said in a note.

Indeed, interest rate futures ticked higher through the course of Powell's appearance, moderating some of the expectations for additional big rate increases at the Fed's remaining four policy meetings of the year.

While another 75-basis-point increase in July remains seen as the most likely outcome, according to CME Group's FedWatch tool, rate futures now signal that the Fed will dial that back to a half-percentage-point rise in September. For year's end, it was increasingly seen as a toss-up between a policy rate in either a range of 3.25% to 3.50% or 3.50% to 3.75%.

Fed officials' latest projections see economic growth slowing to below trend this year while the U.S. unemployment rate - currently 3.6% - starts to tick higher. Meanwhile, they have materially tempered their expectation for how quickly inflation will subside, with a median forecast for a year-end annual rate easing to 5.2% by their preferred measure from 6.3% as of April. In March, they had put that figure at 4.3%.