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\nFederal Reserve Chair Jerome Powell took heat from lawmakers Tuesday after warning that interest rates will need to be raised higher as the central bank continues its fight against inflation.
\u201cThe ultimate level of interest rates is likely to be higher than previously anticipated,\u201d Powell said during a hearing held by the Senate Banking Committee.\u00a0
\u201cIf the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,\u201d Powell said.
Higher interest rates are meant to lower prices by slowing economic activity, which can push the economy into a recession and put people out of work.
There are currently about 5.6 million people looking for jobs with a national unemployment rate of 3.4 percent, the lowest in more than five decades, according to Labor Department data.
But if the Fed hits its expected year-end unemployment rate of 4.6 percent, there will be more than 7.6 million unemployed people, based on calculations by The Hill. That\u2019s about two million more people in need of a job.
\u201c[We\u2019re going to have] two million people out of work. Can you stop it at two million people?\u201d Sen. Elizabeth Warren (D-Mass.) asked Powell.
\u201cHistory suggests that the Fed has a terrible track record of containing modest increases in the unemployment rate.\u201d
Lawmakers in both parties responded with concern to Powell\u2019s more aggressive stance on future rate hikes.
\u201cWhen you\u2019re slowing the economy, you\u2019re trying to put people out of work. That\u2019s your job, is it not?\u201d Sen. John Kennedy (R-La.) said to Powell during the hearing.
\u201cYou\u2019re trying to raise the unemployment rate,\u201d he continued.
The Fed\u2019s baseline interest rate is 4.57 percent after the central bank boosted the overnight bank borrowing rate to a span of 4.5 to 4.75 percent. Fed officials expected to boost that rate to 5.1 percent by the end of this year, according to their latest projection released in December.
But that terminal rate is now expected to be higher and will be updated at the Fed\u2019s rate-setting Federal Open Market Committee (FOMC) meeting later this month.
Warren expressed fears the faster rate hikes would push the economy toward a tipping point.
\u201cOnce the economy starts shedding jobs, it\u2019s kind of like a runaway train. It is really hard to stop,\u201d Warren said.
\u201cIn fact, 11 out of the 12 times that the unemployment rate increased by a full percentage point within one year, unemployment went on to rise another full percentage point on top of that.\u201d
Powell countered that the Fed could not afford to let up its fight against inflation, which he said would bring much deeper pain if left alone. The Fed chief and his colleagues have repeatedly argued that a recession caused by fighting inflation now would pale in comparison to one caused by hyperinflation.
\u201cWill working people be better off if we just walk away from our jobs and inflation remains at 5 [or] 6 percent?,\u201d Powell said.
Powell also argued that the labor market was currently too strong to allow inflation to come down on its own, with wages still rising 4.4 percent over the past 12 months, according to Labor Department data.
But there\u2019s growing concern among some economists that due to the specific nature of the inflation seen in the aftermath of the coronavirus pandemic, during which the global economy was shut down and then rebooted, interest rate hikes may not be the best tool for containing inflation.
That\u2019s because rising prices are generally associated with higher labor costs. But labor share of value in the economy has been falling since the pandemic while the capital share has been increasing along with record corporate profits.\u00a0
That\u2019s a deep structural change in the way the U.S. economy functions that has been throwing economists for a loop.
\u201cThe fact that the labor share is falling is really clear evidence that this is not an inflation driven primarily by rising wages. It\u2019s just very hard to square those things,\u201d JW Mason, an economist at John Jay College in New York, said during an online event on Monday.\u00a0
\u201cThere\u2019s a number of alternative stories we could tell. And I think you can say, well, supply constraints and a rise in global energy prices might actually show up in the US as a rise in profit margins. But I think it\u2019s very hard to square the behavior of labor shares and capital shares with a story of where this is primarily inflation coming from the labor market.\u201d
Lawmakers on Tuesday were also paying attention to these new dynamics.
\u201cWould you agree that changes in the size of corporate profits can be one of the factors that affects the inflation rate?\u201d Sen. Chris Van Hollen (D-Md.) asked Powell on Tuesday, which prompted an affirmative response from Powell.
Van Hollen challenged Powell to contemplate a scenario in which wages and benefits for workers could continue to grow at a healthy level even as inflation comes down to 2 percent, provided that profits for corporations would shrink. Powell said he thought something like this could happen over the \u201cshorter term.\u201d
Markets had been expecting rate hikes of 0.25 percentage points out of the March and May FOMC meetings, but Powell\u2019s comments on Wednesday pushed the probability of a 50-basis point hike at the next meeting above 50 percent, according to a prediction algorithm by financial data company CME.
Powell\u2019s renewed hawkishness on interest rate levels comes after an uptick in the personal consumption expenditures (PCE) price index and a smaller-than-expected drop in last month\u2019s consumer price index (CPI).\u00a0
The PCE annual inflation rate rose to 5.4 percent annually in January after declining for several months in a row while CPI dropped to 6.4 percent annually after analysts thought it would slide further to 6.2 percent.
Inflation is still proving to be a major issue affecting the global economy.
In the UK, consumer prices were up 8.8 percent annually in January. In Japan, they reached a 40-year high of 4.3 percent in January. In Germany, they were up 8.65 percent and over the course of 2022 German inflation averaged 7.9 percent \u2013 its highest level since World War II.<\/p>\n