US Economy Can Withstand Fed Tightening And Omicron Rise, Powell Says

Jan. 11 (Reuters) – Federal Reserve Chairman Jerome Powell during a congressional hearing that highlighted his likely confirmation for a second term as the head of the US central bank, said on Tuesday that the economy should overcome the current COVID-19 surge with only “short-lived effects” and was ready for the start of monetary policy tightening.

Powell was openly endorsed by Republicans and Democrats on the Senate Banking Committee in a session that mostly focused on how the Fed plans to tackle inflation at decades-long highs, why the central bank misdiagnosed the surge in price hikes and what tighter monetary policy would mean for job growth.

The Fed chief said the central bank was determined to ensure that high inflation did not take hold, and that far from slowing job growth, a shift towards higher key interest rates. high levels and a runoff from its holdings were necessary to maintain current economic conditions. expansion in progress.

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If prices continue to rise, the Fed could be forced to raise interest rates this year more than the three-quarter percentage point hikes currently anticipated by policymakers, risking a return to recession.

“Inflation is way above target. The economy no longer needs or wants the very accommodative policies that we put in place,” Powell said in his testimony.

Still, with the Fed’s benchmark overnight interest rate near zero and nearly $ 9 trillion in assets on its books, “there is a long way to go” to anything close to zero. restrictive policy, said Powell. In the meantime, the actions of the Fed “should not have negative effects on the job market”, he added.

“You need to focus on controlling inflation because you won’t have the most jobs without price stability.”

‘A LITTLE AGILE’

The audience had the potential to be combative. Some Democrats have announced their opposition to the re-appointment of Powell, who was elevated to the top of the Fed by former President Donald Trump, and criticized his surveillance of Wall Street; a stock market scandal and the resignation of several senior officials tarnished the Fed’s image; and some Republicans have argued that he is letting the central bank become partisan on issues such as climate change and economic inequality.

But he was largely stable and focused on fundamental economic issues, with Powell offering his most comprehensive commentary to date on how the unprecedented rise in coronavirus cases has affected his outlook.

Despite the disruptions in education, travel and even some basic services, “what we are seeing is an economy that is functioning thanks to these waves of COVID,” said Powell.

The dominant theme, if there was one, centered on inflation, the Fed’s misdiagnosis last year as “transient” and the central bank’s plans to get ahead of it now that it is well ahead of it. target of 2%.

U.S. Federal Reserve Board Chairman Jerome Powell speaks during his Senate Committee on Banking, Housing, and Urban Affairs re-appointment hearing on Capitol Hill, Washington, United States, Jan. 11, 2022. Graeme Jennings / Pool via REUTERS

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Powell said he still believes that even if the level of price hikes forces the Fed to act, some relief will come beyond monetary policy as global supply chains begin to catch up with demand. Mistakenly expecting a quick adjustment, Powell said, this is why the Fed initially dismissed the rise in inflation last year as likely to fade without a response from the Fed, only to see prices continue to climb to levels not seen since the inflationary scares of the 1970s and 1980s.

He said he now believes inflation will come down by mid-year, but the Fed is prepared to tighten borrowing costs if necessary to make sure.

“We’re going to have to be humble but a little nimble,” said Powell, in deciding when and how quickly to raise interest rates and change the holdings of the Fed, which have exploded due to its linked economy support. to the pandemic. .

Powell gave no new clues as to the timing of the interest rate take-off, expected by many analysts to begin in March. He also said that no decision had been made on when to let the size of the central bank’s asset holdings decline, but that this would likely happen “sooner and faster” than after the 2007 recession. -2009, when the Fed waited about two years after a first rate hike to reduce its balance sheet.

U.S. stocks, which started the year on a low note as the Omicron variant fueled an increase in COVID-19 cases and investors repositioned themselves for a Fed more concerned with containing inflation, rose on from Powell’s testimony. Yields on shorter-dated Treasuries have fallen from pandemic-era highs reached earlier today.

PRICE HIKES

The hearing was a first step in Powell’s expected confirmation for a new four-year term. Lael Brainard, currently governor of the Fed, will be questioned Thursday by the same panel for promotion to a four-year term as vice chairman of the Fed.

At the start of Tuesday’s session, Democratic Sen. Sherrod Brown, chair of the panel, and Sen. Pat Toomey, her senior Republican, endorsed Powell’s handling of the Fed’s response to the pandemic, even as they raised questions about its next steps.

“I think you’ve shown leadership” in leading the Fed through debates over inflation, regulation and an ethics scandal over stock trading by senior officials, Brown said.

Toomey said he was concerned that the Fed’s robust response to the pandemic could now fuel inflation and “could become the new normal,” and repeated his criticisms of the central bank by delving into this. which he sees as political issues like climate change and inequality.

In December, the Fed decided to end its purchases of Treasuries and mortgage-backed securities – a legacy of its nearly two-year battle against the economic fallout from the pandemic – by March, and has signaled that it could raise interest rates three times this year.

Financial markets are banking on a slightly more aggressive pace of four rate hikes this year.

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Reporting by Howard Schneider Editing by Chris Reese and Paul Simao

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