Powell says Fed can cool inflation without damaging labor market

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Federal Reserve Chairman Jerome Powell said the central bank’s plan to raise interest rates should not cause a crack in the economy or damage the job market, essentially painting a picture of a “soft landing” rather than a recession.

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High inflation and a strong job market are signs that the economy does not need much easing monetary policy to cushion the shock of the pandemic.

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“It’s really time for us to move from those emergency policy settings to a more normal level. It really shouldn’t have a negative impact 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 the brakes on rising prices. Rising interest rates may curb demand.

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For example, while the Fed plans to raise its benchmark interest rate to 2.1% by the end of 2023, former New York Fed Chairman William Dudley thinks the Fed will likely push its benchmark rate closer to 4% .

Powell told the Senate Banking Committee that inflation came from an imbalance of supply and demand. While the Fed can cool demand, it will get some help as the supply crunch eases.

“We think we will return to normal supply conditions over the course of this year,” Powell said.

Powell said he expects high inflation to persist “well into the middle of the year.” He added that if inflation remains at higher levels for longer than expected, the Fed will have to raise rates further over time.

“We’re trying to move to a place where we’re more neutral, and maybe tighter if that’s appropriate,” he later said.

The Fed chairman also said the central bank may decide to allow it to shrink its massive $8.8 trillion balance sheet this year. Some Fed officials are pushing for balance sheet reductions soon after the first rate hike, which is expected to arrive in March.

Fed’s Meister Sees 3 Rate Hikes Starting in March This Year

Asked about the Omicron version, Powell said while this could hamper growth, the slowdown would be “short-term”.

Dow Jones Industrial Average DJIA,
According to Powell’s testimony Tuesday was down more than 100 points. Yield on 10 Year Treasury TMUBMUSD10Y,
increased to 1.769%.


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