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Fed’s Powell Says Economy ‘Very Strong,’ Committed to Stamping Out Rampant Inflation

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  • Fed’s Powell Says Economy ‘Very Strong,’ Committed to Stamping Out Rampant Inflation

    U.S News & World Report
    Tim Smart

    Federal Reserve Chairman Jerome Powell on Wednesday said the U.S. economy is “very strong” as the central bank tightens monetary policy to combat the worst inflation since the 1980s.

    © (Jose Luis Magana/AP)Federal Reserve Board Chair Jerome Powell speaks during the Inaugural Conference on the International Roles of the U.S. Dollar at Federal Reserve Board Building, in Washington, Friday, June 17, 2022. (AP Photo/Jose Luis Magana)

    “Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” Powell said in opening remarks to the Senate Banking Committee. “We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time.”

    “We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability,” Powell added. “The American economy is very strong and well positioned to handle tighter monetary policy.”

    For his part, committee Chairman Sherrod Brown, Ohio Democrat, laid the blame for inflation on everything from greedy corporations to cryptocurrencies to the lack of unions.

    Republicans, meanwhile, used the occasion to bash the Biden administration and the Fed for being too slow to recognize the threat of inflation early enough while Democratic Sen. Elizabeth Warren of Massachusetts warned that rising interest rates will lead businesses to lay off workers.

    “I believe the Federal Reserve and this administration failed the American people,” Republican Sen. Richard Shelby of Alabama said.

    Powell did acknowledge that the primary aspects of consumer inflation, namely gasoline and food prices, are not likely to come down just because interest rates are headed higher.

    “There’s really not anything we can do about oil prices,” Powell said in response to a question from Democratic Sen. Catherine Cortez Masto of Nevada.

    The testimony is part of the Fed’s biannual report to Congress on the state of the economy and monetary policy.

    It comes at a time when the Fed and Powell have been under heavy criticism for failing to spot the depth of the inflation that began to show up following the recovery from the coronavirus pandemic and then was exacerbated in February by Russia’s invasion of Ukraine. Powell and others insisted that inflation was “transitory” and limited to pandemic-related aspects of the economy.

    But as inflation began showing up not just in long-lived goods prices but also in the service sector of the economy, the Fed shifted and in May began raising interest rates while also cutting back its holdings of bonds and mortgage-backed securities. Those actions reversed years of loose monetary policy that allowed interest rates to remain near zero, encouraging a booming housing market and, until recently, rising stock prices.

    Now, markets are torn between believing that strong consumer balance sheets and low unemployment will allow the Fed to engineer a so-called soft landing for the economy and fears of a recession that will make that impossible.

    After climbing more than 600 points Tuesday, the Dow Jones Industrial Average was down about 250 points at the opening Wednesday. The recent downturn has left stocks in a bear market.

    “Looking back at bear markets throughout history, a key determining factor of where the declines ended has been whether the U.S. economy goes into recession,” LPL Financial Chief Market Strategist Ryan Detrick wrote on Tuesday. “With a recession, bear market declines have averaged 24%, close to where the S&P 500 is now. LPL Research puts roughly 50% odds of recession in the next 12 to 18 months, and sees a mild recession if we get one, while the market has already priced in about a 70% chance of recession.”

    Influential economist and former Fed vice-chairman Bill Dudley wrote in Bloomberg Wednesday that the economy faces a recession within the next 12 to 18 months as tighter monetary policy and dampening consumer spending combines to produce a “hard landing.”

    “Much like Wile E. Coyote heading off a cliff, the US economy has plenty of momentum but rapidly disappearing support,” the former Goldman Sachs economist said. “Falling back to earth will not be a pleasant experience.”

    Copyright 2022 U.S. News & World Report