Powell says U.S. economy can withstand monetary tightening, upswing omicron cases

The Federal Reserve’s (Fed) plans to tighten monetary policy this year should not weaken strong employment in an economy that “no longer need or want“The massive stimulus provided by the US central bank, said Fed Chairman Jerome Powell.

In his testimony before the Senate Banking Committee, Powell stated that he expected the country to overcome the current increase in coronavirus cases, with an impact on the economy “transient”And probably without thwarting plans to raise interest rates and reduce your asset holdings this year.

Powell assured lawmakers, who appeared to be leaning toward backing him for a second four-year term, that inflation is now the Fed’s primary focus as price increases march on a 40-year high and well above the target of 2% from the Fed.

In fact, he told the Democrat-controlled panel that prices needed to stabilize to keep economic expansion and job growth going.

“Inflation is well above target. The economy no longer needs or wants the very expansionary policies that we have hadPowell pointed out. But “It’s a long way“For monetary policy to return to normal, and although it was time to end emergency measures due to the pandemic, that” should not have negative effects on the labor market.

Inflation was the focus of lawmakers’ attention during the hearing, and Powell said he still felt that while the level of price increases required the Fed to act, some relief would come beyond monetary policy as the Global supply chains will start to catch up with demand.

Wrongly expecting the adjustment to happen quickly, he claimed, is the reason the Fed initially estimated the rise in inflation last year as “transient”, Only to see that it continued to increase.

He commented that he now believes inflation will subside by the middle of this year, but that the Fed is ready to do whatever it takes to prevent the high rates of price increases from “take root”.

“We will have to be humble but skillful”He commented, in deciding when and how quickly to raise interest rates and change asset holdings, which have soared to more than $ 8 trillion.

Powell stated that no decision has been made on the normalization of monetary policy, but that the Fed is likely to decide to reduce the balance sheet “earlier and faster”Than after the recession of 2007-2009.

Interest rates

The hearing is a first step in the long-awaited confirmation of Powell by the full Senate for a new four-year term as Fed chairman. Lael Brainard, current Fed governor, will be questioned by the same panel on Thursday for a four-year term as vice president.

In December, the Fed decided to end its purchases of Treasury bonds and mortgage-backed securities by March – a legacy of its nearly two-year battle against the economic fallout of the pandemic – and said it could raise interest rates. interest three times this year.

Since then, COVID-19 infections have reached record daily figures, with increased hospitalizations and employee quarantine undermining an already stretched labor supply, with some observers expecting it to escalate. even more the mismatch between supply and demand that is pushing up prices.

Investors and traders will be on the lookout for new clues as to when the Federal Reserve could start raising its interest rates and possibly reducing its bond holdings to curb inflation.

Financial markets anticipate an aggressive response and interest rate futures traders are betting on four hikes this year.