Federal Reserve Chairman Jerome Powell pledged on Tuesday to use all of the central bank’s tools, including raising its benchmark interest rate, to tame soaring inflation.
“If we have to raise interest rates more over time, we will,” Powell told senators at his nomination hearing for a second term. “We will use our tools to get inflation back” under control, noting that high inflation is a “severe threat” to economic expansion.
The central bank’s willingness to be aggressive in controlling inflation is a key point of debate as consumer prices soar to the highest levels in decades. Prices jumped 6.8% in the 12 months through November, marking the highest inflation rate since June 1982, and on Wednesday, the government may report it accelerated to 7% in December.
At the last meeting of the Fed’s policy-making arm, most members penciled in three increases in the benchmark interest rate, or fed funds rate, this year, but Powell said the central bank would adjust if high inflation proved to be persistent. Inflationary pressure will be around through the middle of 2022, he predicted.
Some economists have already noted the possibility of more than three rate increases this year. Goldman Sachs’ Jan Hatzius said earlier this week he now expects the Fed to raise rates four times, starting in March and ending in December.
Part of the reason for soaring prices, Powell said, is a mismatch between supply and demand. Supply chains have slowed as demand for goods has increased, in part due to government stimulus money. Powell said that situation will get better when the pandemic fades and a larger supply of goods becomes available. If demand is still too much, the Fed can step in.
“Our principal tool is interest rates, and they affect demand over time,” Powell said. A higher target for the fed funds rate has a ripple effect through the economy. Borrowing becomes more expensive, which in turn dampens spending.
“We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation,” he added. “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
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