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Federal Reserve Chairman Jerome Powell said the central bank’s plans to raise interest rates should not throw a wrench in the economy or damage the job market, essentially painting a picture of a “soft landing” rather than a recession.
High inflation and a strong job market are signs that the economy doesn’t need the very easy monetary policy put in place to offset the shock of the pandemic.
“It really is time for us to move away from those emergency policy settings to a more normal level. It really should not have negative effects on the labor market,” Powell said.
Many analysts, including former Fed officials, have warned that the Fed is behind the curve on inflation and will have to slam on the brakes to curb rising prices. Rising interest rates can curb demand.
For instance, while the Fed has penciled in a plan to raise its benchmark interest rate to 2.1% by the end of 2023, former New York Fed president William Dudley thinks the Fed will likely have to push its benchmark rate up closer to 4%.
Powell told the Senate Banking Committee that inflation came from the imbalance of supply and demand. While the Fed can cool demand, it will get some help as supply constraints ease.
“We do think we’ll get, over the course of this year, return to normal supply conditions,” Powell said.
Powell said he expects high inflation to last “well into the middle of the year.” If inflation persists at high levels longer than expected, the Fed will have to raise rates more over time, he added.
“We’re trying to get to a place where we’re more neutral, and then perhaps tight if that’s appropriate,” he said later.
The Fed chairman also said the central bank may decide to allow its massive $8.8 trillion balance sheet to shrink this year. Some Fed officials are pressing to start to shrink the balance sheet soon after the first rate hike, which looks likely to come in March.
Powell declined to rule out selling assets to shrink its balance sheet.
“We didn’t do that last time. We never ruled it out either,” he said
Powell said “more clarity” is coming on the balance sheet.
Read: Fed’s Mester sees 3 rate hikes this year, starting in March
Asked about the omicron variant, Powell said it might cause a pause in growth, but that this slowdown would be “short-lived.”
After falling sharply, the Dow Jones Industrial Average
DJIA,
recovered as Powell’s testimony progressed. The yield on the 10-year Treasury
TMUBMUSD10Y,
inched down to 1.765%.
