US Federal Reserve Chair Jerome Powell acknowledged on Tuesday that high inflation has emerged as a serious threat to the Fed's goal of helping put more Americans back to work and that the Fed will raise rates more than it now plans if needed to stem surging prices.
“If we have to raise interest rates more over time, we will,” Mr Powell said during a hearing of the Senate Banking Committee, which is considering his nomination for a second four-year term.
The stark challenge for Mr Powell if he is confirmed as expected for a new term was underscored by the questions he faced from both Democratic and Republican senators. Mr Powell and the US central bank are under rising pressure to rein in inflation without ramping up interest rates so high that the economy tumbles into another recession.
On Tuesday, Mr Powell took pains to rebuff suggestions from some Democratic senators that rate increases would slow hiring and potentially leave many people, particularly lower-income and black Americans, without jobs. Fed rate increases typically lead to higher rates on many consumer and business loans and have the effect of slowing economic growth.
But Mr Powell made clear that he is now more worried about the damage that rising inflation could inflict on the job market.
“High inflation is a severe threat to the achievement of maximum employment,” he said.
The economy, the Fed chair added, must grow for an extended period to put as many Americans back to work as possible. Controlling inflation — without raising rates so high as to choke off the economic recovery — is critical to lowering unemployment, Mr Powell said.
“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 told the committee.
Mr Powell’s nomination is likely to be approved by the committee sometime in the coming weeks and then confirmed by the full Senate with bipartisan support.
Economists and former Fed officials are increasingly raising concerns that the Fed is behind the curve on inflation.
Last Friday’s jobs report for December, which showed a sharp drop in the unemployment rate to a healthy 3.9 per cent, and an unexpected wage increase, has helped fan those concerns. While lower unemployment and higher pay benefit workers, those trends can potentially fuel rising prices.
Mr Powell has previously said that the Fed’s initial goal was to restore the economy and job market to pre-pandemic levels, when the unemployment rate had fallen to a 50-year low of 3.5 per cent and the proportion of Americans either working or looking for work was higher than it is now.
But more recently, Mr Powell has acknowledged that many of the people who stopped working or seeking jobs in the pandemic are unlikely to return anytime soon. Millions of older Americans retired earlier than they likely would have without Covid-19, and many people are foregoing jobs to avoid getting infected.
That has left businesses chasing fewer workers to fill more than 10 million open jobs, a near-record, and has forced them to rapidly increase hourly pay. Rising pay could fuel more spending, possibly pushing prices higher.