Elizabeth Warren to Fed chair Jerome Powell: Don't 'drive this economy off a cliff'

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

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

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

“I don’t think so,” Powell said.

Warren asked if grocery prices will drop 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 families and the risk of a recession.

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

Warren said rate hikes, however, would increase households’ borrowing costs and could lead to job losses.

“Inflation is like a disease and the drug needs to be tailored to the specific problem, otherwise it could make things much worse,” Warren said. “Right now the Fed has no control over the main drivers of rising prices, but the Fed can curb demand by laying off lots 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 he considers that before he drives this economy off a cliff.”

Senators on both sides of the aisle sought to blame rising inflation on a variety of factors, including the pandemic stimulus, wage growth and corporate price increases. However, Powell declined to weigh in on any of those politically hot topics.

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

The Fed promises to control inflation

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

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

Powell, whose comments echoed those he made last week at the Fed meeting, said officials plan to continue raising interest rates to control inflation. The Fed’s rate hike last week was the biggest since 1994.

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

Powell faces questions about why the Fed waited until March to raise interest rates and why he felt the need to speed up 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 constraints have been “bigger and longer lasting” than anticipated and the war in Ukraine has pushed up energy prices.

“Obviously, inflation has surprised to the upside over the last year, and more surprises could be expected,” Powell said. “So we need to be nimble in responding to incoming data and evolving insights.”

Recession ‘certainly a possibility,’ but not the goal

Asked if rate hikes could spark a recession, Powell said “it’s certainly a possibility” but stressed that’s not the Fed’s “intent.”

However, Powell admitted that the risks are increasing.

“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 a strong labor market,” Powell said.

The Fed chief said later that he doesn’t think a recession is needed to control inflation.

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

House prices should finally start to stabilize

Powell, whose policies have helped spark a historic housing boom, expects home price gains to decline because of rising mortgage rates.

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

“Housing prices should stop rising at such a rapid rate,” Powell said. “Since the start of the pandemic, we’ve had a very, very active housing market … across the country. As demand for homes moderates … you should see prices stop rising.”

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

Though he expects prices to cool, Powell cautioned that the Fed does not control home supply and said builders have warned of supply constraints. “That’s not something the Fed can do anything about,” he said.

Another complication is that rising mortgage rates, which are rising at the fastest pace since 1987, will hurt some people who want to buy homes.

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

Additional reporting by Alicia Wallace

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