One of Federal Reserve Chairman Jerome Powell’s biggest critics on Capitol Hill said he has the power to drive the economy “off a cliff” by hiking interest rates.
Sen. Elizabeth Warren (D-MA), who didn’t support Powell’s renomination to lead the Fed, used her time at Wednesday’s Banking Committee hearing to question the actions the Fed has taken to drive down soaring inflation.
POWELL PROMISES BIG RATE HIKES UNTIL ‘COMPELLING EVIDENCE’ INFLATION IS FALLING
Warren started by getting Powell to delineate what price pressures the Fed can and cannot control by raising its interest rate target. She pointed out that oil prices have skyrocketed since Russia invaded Ukraine and asked whether the Fed’s tightening will push those prices down. Powell said it will not.
Warren pointed out that energy increases drove a third of last month’s inflation reading, telling Powell, “But the Fed’s tools, as you say, have no impact here.”
She also asked about food prices. The cost of staple goods at the grocery store has increased dramatically over the past year. Warren asked Powell if raising the Fed’s interest rate target will help lower food costs.
“I wouldn’t think so, no,” the Fed chairman responded.
May’s consumer price index report showed inflation rising again to 8.6%, the highest since 1981. Fed officials voted to raise interest rates by three-fourths of a percentage point last week, the largest hike since 1994.
During Wednesday’s hearing, Powell described to Warren the effects that raising interest rates has on the economy. He said that when rates are hiked, demand for goods slows and thus prices go down to meet the dampened demand. Doing so will allow supply and demand “to get into better balance,” he noted.
The chairman pointed out that as rates increase, asset prices will moderate across the economy and people will spend a little less with their lower levels of wealth. He added that raising the rates also causes the dollar to strengthen relative to other currencies.
Warren then used her time to highlight the deleterious effects that raising interest rates can have on the economy.
“Rate increases make it more likely that companies will fire people and slash hours to shrink wage costs. Rate increases also make it more expensive for families to do things like borrow money for a house,” Warren said. “You could actually tip this economy into recession.”
Warren said high inflation and millions of people out of work because of a recession is a worse economic scenario than the current one, with high inflation and low unemployment.
“I hope you’ll reconsider that before you drive this economy off a cliff,” she said.
Powell and Fed officials have become much more hawkish with reining in inflation after the May consumer price index report.
The Fed is now signaling another 75-basis point hike might be in store for July, and Powell has promised to continue the more aggressive tightening until he sees proof that too-high inflation has been beaten back.
“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” he said at the hearing. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”