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Powell says he sees a path where inflation cools without significant job losses

Federal Reserve Chairman Jerome Powell said Thursday that US inflation is likely to cool without a big rise in the unemployment rate.

At a Senate Banking Committee hearing, Sen. Tina Smith, R-North Dakota, asked Powell if he saw “a path for inflation to continue to slow without seeing significant job losses and hurting middle-class families.” . Powell replied: “Yes, I do.”

Powell said the job market is gradually cooling off and “that’s what we’d like to see.”

Economists say the biggest surprise for the US economy this year has been the continued strength of the job market despite the Fed’s rapid rate hikes over the past 15 months.

On the one hand, economists say the resilient job market means the Fed’s tightening of monetary policy will result in a “soft landing” or “mild recession” for the economy.

But other economists worry that the strong labor market could ultimately make it more difficult to cut to the central bank’s 2% target.

Harvard economist Jason Furman told the New York Times there is a “bad scenario” in which the unemployment rate will need to rise closer to 10% for inflation to return to target.

The unemployment rate is now 3.7% and Fed officials have forecast that it will rise to 4.5% by the end of 2024.

Democrats on the Senate panel said they supported the Fed’s decision to hold interest rates steady after raising them at every meeting since last March.

“For many of us who are concerned that more rate hikes would do more harm than good, that’s good news,” said Sen. Sherrod Brown, D-Ohio and chairman of the banking committee.

Powell has said a few times that a “vast majority” of Fed officials believe the Fed will engineer two more 25 basis point rate hikes by the end of the year. That would push the Fed rate into a 5.5%-5.75% range.

In response to the senators’ concerns, Powell said the Fed “is trying to avoid the mistake of going too far.”

“It only makes sense to move at a careful pace,” Powell added.

On the banking sector, Powell said the Fed is working with smaller banks that have a concentration on commercial real estate lending.

“We are working with the banks to get past this,” Powell said.

The rapid collapse of Silicon Valley Bank in early March highlighted the potentially painful losses looming for banks for trillions of dollars in commercial real estate loans on their books. Office building valuations have fallen sharply as many Americans continue to work from home.

Republicans on the Senate panel argued that the Fed’s plans to raise banks’ capital standards in the wake of bank failures this spring will hurt the banking sector and lead to fewer loans to businesses.

“My question is how much is too much? And when is enough? The higher the capital standards, the less capital for the private sector, which means less borrowing and less capital for those who are actually creating jobs,” said Senator Tim Scott, the ranking Republican on the Banking Committee. .

Powell said the Fed has not yet finished working on its plan to raise bank capital. He said he didn’t expect the final version to raise capital standards for banks with less than $100 billion in assets.

Sen. Elizabeth Warren, D-Massachusetts, said she didn’t think Powell was taking enough responsibility for the spate of bank failures earlier this year.

In a testy exchange, Powell said he was focused on learning the right lessons lest a repeat of a major bank failure spread contagion to the banking system.

“My focus is to keep going,” Powell said.

See also: The FDIC is studying a plan to include smaller US banks in Basel III capital requirements after bankruptcies in early 2023

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