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Federal Reserve Chairman Jerome Powell told lawmakers on Thursday that Aggressive interest rate hike to check inflation Unemployment can pick up on Main Street.
Powell said that although it is “certainly possible” to keep inflation under control without job losses, it may not.
“There is a risk that unemployment will rise, albeit from historically low levels,” Powell said during a hearing before the House Financial Services Committee.
Powell said the Fed’s interest rate hike is “designed to drive growth to a level that is more sustainable and gives the supply side a chance to catch up.”
However, he acknowledged that the Fed doesn’t have the “precise tools” and a job loss could be in the cards.
The unemployment rate was only 3.6% in May, up from around 15% in April 2020. Last week, Fed officials projected the unemployment rate to rise to 3.9% at the end of 2023 and 4.1% at the end of 2024.
Powell said unemployment above 4% “would still be very strong.”
The Fed chairman said today there are two vacancies for every unemployed person. “It’s a labor market that’s kind of overheating,” he said.
Powell conceded that the US central bank had misjudged the risk of high inflation.
Republican Representative Ann Wagner told Powell that she believed the Fed “underestimated real inflation” and asked what officials missed here.
“We underestimated it. With the benefit of the vision, clearly we did,” Powell said in response, reiterating previous comments that he acknowledged that it would be appropriate for the Fed to move faster to fight inflation.
The Fed chief said it comes down to the decision to let officials know when the supply-side problems associated with COVID-19 will subside.
“Every central bank had to make the same decision,” Powell said.
In particular, he pointed to uncertainty about when the supply chain and the flow of workers will return to normal.
Powell said “thought people would come back” as the vaccines were put in place, thinking that society would be “done with Covid by the end of the year.”
As it turns out, the supply-side problems didn’t get better and remain problematic.
“That was the decision we had to make. We knew it could go wrong. And when it started to feel terribly wrong, we pivoted,” Powell said.
Asked how the Fed would react in a situation where unemployment rises and the economy shrinks but inflation remains high, Powell emphasized the focus on inflation.
“The main thing is that we can’t fail at this. We really have to bring inflation down to 2%,” Powell told lawmakers. “We want to see evidence before we declare any kind of victory that this Really coming down.”
Powell indicated that the Fed will not be as quick to reduce interest rates as in previous recessions.
“I think we would be reluctant to make the cut,” he said.
Powell said Fed officials “will try to make good decisions in real time.”
The Fed chief also declined to support comments by former Treasury Secretary Larry Summers, who reportedly said five years of unemployment above 5% or one year of 10% unemployment are needed to keep inflation under control. Will be
Powell said the answer largely depends on what happens to supply constraints.
“We won’t see anything like this,” Powell said, adding that it’s a “highly uncertain time” if the supply-side problems are resolved.