The Federal Reserve Chairman warns of the risks of new surprises with inflation | Economie

Federal Reserve Chairman Jerome Powell made clear on Wednesday in the US Senate that his priority is the fight against inflation. In his semi-annual appearance before Congress, Powell declared that he was “strongly committed” to bringing inflation down “in a rapid manner,” but acknowledged the risk of new surprises with inflation. In his view, the US economy is strong and can tolerate tighter monetary policy and will continue to raise interest rates. However, fears are growing that this will lead to a recession.

The Federal Reserve this month approved the largest rate hike since 1994 by 0.75 percentage point. In doing so, it is trying to combat high inflation, which reached 8.6% in May, the highest rate in the past 40 years. Powell admitted that he would have started raising interest rates sooner if he imagined rates would get out of hand. Today it receives criticism from some senators. Both Powell and the Treasury secretary initially believed that inflation would be a passing phenomenon that would recede relatively quickly. They were wrong.

Powell admitted that “developing appropriate monetary policy in this uncertain environment requires recognizing that the economy tends to develop unpredictably,” adding: “It is clear that inflation has surprised the upward trend over the past year, and there may be new surprises. Therefore, we will have to To be flexible in responding to new data and evolving prospects.”

Powell already indicated after the last meeting of the Federal Reserve’s monetary policy committee that he planned in July to raise the interest rate by 0.5 or 0.75 points. “I think what you’ll see is continued progress, rapid progress toward raising interest rates,” he told the Senate Banking Committee Wednesday. Tomorrow he appears before the Federal Financial Services Commission.

The unemployment rate is 3.6%, near historic lows. The Fed understands that raising interest rates will affect demand. “We don’t want to reduce demand. We want to reduce growth,” he said. “Reducing demand will cause a recession.” Although Powell’s forecast remains relatively optimistic, voices talking about the risks of a recession have not stopped growing. US President Joe Biden, whose popularity has been hit hard by rising prices, said this week that a recession is not inevitable.

Recession “a possibility”

In this context, Powell noted in his opening speech: “We will strive to avoid adding uncertainty at a very difficult and uncertain time. We are very concerned about inflation risks and determined to take the necessary measures to restore price stability. The US economy is very strong and well positioned to deal with monetary policy.” tighter.”

The Federal Reserve still believes that a soft landing of the US economy can be achieved, i.e. controlling inflation without causing high unemployment and entering the country into a recession. “We’re not trying to cause, and we don’t think it’s necessary to cause a recession,” Powell said on Wednesday. But he acknowledges that factors outside his control, such as bottlenecks in the supply chain or prices for energy and other raw materials, could make that impossible.

In fact, there is even a risk of the opposite happening, as this activity stops growing, but prices are not contained and the economy enters a phase of stagflation. Do you know what’s worse than high inflation and low unemployment? It’s high inflation and stagnation with millions of people out of work,” exclaimed Democratic Senator Elizabeth Warren.

When asked whether raising interest rates could cause a recession, Powell admitted: “It sure is a possibility. It’s not what we’re looking for, but it’s a possibility.” The Fed Chairman made it clear that raising interest rates would exceed what is considered a neutral interest rate, a rate that neither encourages nor slows down the economy. Powell wants to see evidence that inflation is contained. When he returns to more moderate levels, he will be able to moderate in rates as well.

“At the Federal Reserve, we understand the difficulties that high inflation causes. We are deeply committed to lowering inflation and are moving quickly to do so. We have the tools and the determination to restore price stability for the benefit of American families and businesses. It is imperative that we lower inflation if we are to have a sustainable period of solid conditions in the future. A labor market that benefits everyone,” Powell began his initial intervention.

Powell declined to give lawmakers advice on what they should do to help bring down inflation. “What I must do is fulfill the mandate he has given me,” which is to maintain price stability with the highest level of sustainable employment.

Congress will have the opportunity to do its part to suspend the federal fuel tax for three months (July-September) that Joe Biden, the president of the United States, demanded on Wednesday. This tax is 18 cents per gallon (about 5 cents a liter) for gasoline and 24 cents per gallon for diesel. What those prices raised last year is tiny, with a 4% reduction, compared to a 60% increase, by about $2.

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