Jerome Powell Says Fed Will Raise Rates More Than Planned If Inflation Gets Worse

Federal Reserve Chairman Jerome Powell said the agency is prepared to take steps to combat inflation in 2022, including potentially raising interest rates higher than previously planned if necessary, during a hearing in front of the Senate Banking Committee on Tuesday.

The committee held the hearing as the first step in the process to decide whether to confirm Powell for a second four-year term as head of the Federal Reserve.

Powell acknowledged the harm inflation can cause to average Americans as well as to the economy in general.

"We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation," Powell said.

He said there are currently three increases to short-term interest rates planned for this year, although many economic experts and analysts have said a fourth increase is possible or even likely.

For the economy to stabilize and recover, millions of Americans will have to return to work making wages that can allow them to afford essential needs, which also are affected by inflation.

"High inflation is a severe threat to the achievement of maximum employment," he said.

Powell is expected to be confirmed by the Senate Banking Committee in the coming weeks, and will likely pass through the Senate with bipartisan support, provided the senators are satisfied with his stated plans to assist in the recovery of the economy and the slowing of inflation.

Jerome Powell, Federal Reserve, Inflation
Federal Reserve Board Chairman Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill on January 11, 2022, in Washington, D.C. Powell told the committee the Fed is prepared to take steps to assist in the recovery of the economy in 2022. Brendan Smialowski/AFP via Getty Images

The stark challenge for Powell if he is confirmed as expected for a new term was underscored by the questions he faced from both Democratic and Republican senators. Powell and the central bank are under rising pressure to rein in inflation without ramping up interest rates so high that the economy tumbles into another recession.

On Tuesday, Powell took pains to rebuff suggestions from some Democratic senators that rate increases would slow hiring and potentially leave many people, particularly lower-income and Black Americans, without jobs.

Fed rate increases typically lead to higher rates on many consumer and business loans and have the effect of slowing economic growth. But Powell made clear that he is now more worried about the damage that rising inflation could inflict on the job market.

The economy, the Fed chair added, must grow for an extended period to put as many Americans back to work as possible. Controlling inflation—without raising rates so high as to choke off the economic recovery—is critical to lowering unemployment, Powell said.

Before the Fed chair spoke, he received expressions of bipartisan support from the chair of the committee, Democratic Senator Sherrod Brown from Ohio and Pennsylvania Senator Pat Toomey, the senior Republican on the panel.

"The president is putting results over partisanship, re-nominating a Federal Reserve chair of the other political party," Brown said. "As chair, together with President Biden, he has helped us deliver historic economic progress."

"There is broad bipartisan backing for Chairman Powell's re-nomination," Toomey added.

Inflation has soared to the highest levels in four decades, and on Wednesday the government is expected to report that consumer prices jumped 7.1 percent over the past 12 months, up from November's 6.8 percent year-over-year increase.

Economists and former Fed officials are increasingly raising concerns that the Fed is behind the curve on inflation. Last Friday's jobs report for December, which showed a sharp drop in the unemployment rate to a healthy 3.9 percent, and an unexpected wage increase, has helped fan those concerns. While lower unemployment and higher pay benefit workers, those trends can potentially fuel rising prices.

At the Fed's most recent meeting in December, Powell said the central bank is rapidly accelerating its efforts to tighten credit with the goal of reining in inflation. The Fed will stop buying billions of dollars of bonds in March, ahead of its previously announced goal of doing so in June. Those bond purchases have been intended to encourage more borrowing and spending by lowering longer-term rates.

Powell also said in his prepared remarks that the U.S. job market is "strong" and the economy is "expanding at its fastest pace in many years." But he also conceded that the economy has suffered some longer-term damage from the pandemic.

"We can begin to see that the post-pandemic economy is likely to be different in some respects," the Fed chair said. "The pursuit of our goals will need to take these differences into account."

Powell has previously said that the Fed's initial goal was to restore the economy and job market to pre-pandemic levels, when the unemployment rate had fallen to a 50-year low of 3.5 percent and the proportion of Americans either working or looking for work was higher than it is now.

But more recently, Powell has acknowledged that many of the people who stopped working or seeking jobs in the pandemic are unlikely to return anytime soon. Millions of older Americans retired earlier than they likely would have without COVID, and many people are foregoing jobs to avoid getting infected.

That has left businesses chasing fewer workers to fill more than 10 million open jobs, a near-record, and has forced them to rapidly increase hourly pay. Rising pay could fuel more spending, possibly pushing prices higher.

The Associated Press contributed to this report.