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By Heather Scott
The US economy remains strong but a series of aggressive rate hikes meant to cool soaring inflation could eventually trigger a recession, Federal Reserve Chair Jerome Powell cautioned Wednesday. Bulletin news
Powell, whose testimony before senators was closely watched by investors and analysts, also said the world’s largest economy faces an “uncertain” global environment and could see further inflation “surprises.”
The Fed chair again stressed that the US central bank understands the hardship caused by rising prices and is committed to bringing down inflation, which has reached a 40-year high.
Last week, the Fed announced the sharpest interest rate increase in nearly 30 years and promised more action to combat the price surge, with gas and food costs skyrocketing and millions of Americans struggling to make ends meet.
But when peppered with questions about the prospect of a recession, Powell admitted it could not be ruled out.
“It’s not our intended outcome at all, but it’s certainly a possibility,” he told the Senate Banking Committee.
“And frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is two percent inflation and still a strong labor market.”
In his opening remarks, Powell insisted the US economy “is very strong and well positioned to handle tighter monetary policy.”
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” the Fed chief said in his semi-annual appearance before Congress.
Policymakers “will need to be nimble” given that the economy “often evolves in unexpected ways,” he said.
The Fed is facing intense criticism that it was too slow to react to the changing economy, which benefited from a flood of federal government stimulus.
Last week’s super-sized 0.75-percentage-point increase in the benchmark lending rate was the third since March, taking the policy rate up a total of 1.5 points. Powell at the time said more such increases were likely in July.
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“I think it’s going to be very challenging. We’ve never said it was going to be easy or straightforward,” Powell said when asked about efforts to stave off recession.
- ‘Essential’ to curb inflation –
In addition to easing the financial strain on less-wealthy American families, the Fed chief said tamping down inflation was “essential… if we are to have a sustained period of strong labor market conditions that benefit all.”
The US economy recovered quickly from the Covid-19 pandemic, helped by robust consumer spending, and has continued to create jobs at a strong pace, averaging 408,000 in the past three months.
Unemployment is near a 50-year low.
But the buoyant demand for homes, cars and other goods clashed with transportation and supply chain snarls in parts of the world where Covid-19 has remained a challenge.
That fueled inflation, which got dramatically worse after Russia invaded Ukraine in late February and Western nations imposed stiff sanctions on Moscow, sending food and fuel prices up at a blistering rate.
Powell said the fallout from the conflict “is creating additional upward pressure on inflation.”
In addition, “Covid-19-related lockdowns in China are likely to exacerbate ongoing supply chain disruptions.”
But he noted that the issue is not unique to the United States.
“Over the past year, inflation also increased rapidly in many foreign economies,” he said.
In fact, many major central banks have joined the Fed in beginning to tighten monetary policy — with the notable exception of the Bank of Japan.
Powell pointed to signs that rising rates are having an impact, as business investment slows and “activity in the housing sector looks to be softening, in part reflecting higher mortgage rates.”
Average home loan rates jumped to 5.23 percent in May for a 30-year, fixed-rate mortgage, from 4.98 percent in April, according to Freddie Mac, while the median price for homes topped $400,000 for the first time.
“The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply,” Powell said.
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Notes From APS Radio News
During the past few years, a number of the world’s central banks have engaged in massive programs of monetary expansion, even as jobs and businesses were lost by way of virus-related restrictions and quarantines.
For example, beginning in March of 2020, the US Federal Reserve engaged in a substantially greater program of monetary expansion by purchasing hundreds of billions of dollars of Treasury and corporate bonds.
Since the early part of March 2020 to date, the Federal Reserve has added over $4 trillion to its holdings.
In particular, whereas on or about February 24, 2020, the holdings of the Federal Reserve stood at $4.2 trillion, on or about January 17, 2022, the holdings of the Federal Reserve stood at about $8.9 trillion.
As well, the Federal Reserve has kept interest rates low.
Recently, Jerome Powell, the head of the Federal Reserve, said that he wasn’t concerned about inflation and that, for the none, the Federal Reserve would keep interest rates at low levels.
Another examples is that of the Bank of Japan.
According to Fred Economic Data, as of October 2021, the Bank of Japan’s holdings were about $6.4 trillion or about 725 trillion Yen.
In the early part of March 2020, the Bank of Japan’s holdings were $5.3 holdings. During the period mentioned, the Bank of Japan added over one trillion dollars to its holdings.
A number of corporations have been borrowing money inexpensively and have been purchasing their own shares of stocks, increasing share prices of stocks.
Still, there are concerns among investors.
A number of them have expressed concerns about central banks’ eventually increasing interest rates, as, during the past year, inflation levels have been increasing.
The combination of low interest rates, expansive monetary policies, fiscal stimulus programs, which themselves have infused trillions into the US economy, and shortages of goods and services caused by virus-related restrictions and lockdowns has increased levels of inflation.
Investors also have worried, for example, about announcements that were made by companies like Toyota and VW; months ago, those companies announced that because of shortages of particular types of material, they would be reducing levels of production.
Months ago, the results of a survey of UK manufacturers were released.
That survey indicated that many businesses in the UK were concerned about shortages of supplies.
In general, jobs and businesses have been lost by way of mandates, restrictions and quarantines, which, in their turn, were imposed by way of the virus narrative.
In the US, overall, the mortality rate of the virus is about .069%, according to Statista, an award-winning service.
The recovery rate is over 99% for most age groups.
What has followed in the wake of lockdowns and mandates has been the infusion of trillions of dollars into the US economy, the increasing succeess of online businesses like Amazon and other large online retailers, various bank and tech-related stocks, the shuttering of small to medium-sized businesses and the loss of millions of jobs.
Another result has been the increasing levels of inflation, especially those of food and fuel.
In official terms, for purposes of reporting, the US Labor Department uses what is called “core inflation”.
Core inflation excludes items like food and fuel, as those are deemed too volatile.
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