US Federal Reserve (Fed) Chairman Jerome Powell acknowledged on Wednesday that the strength of inflation had surprised monetary authorities and warned that “other surprises” could occur. In a speech he was to deliver to Congress, Jerome Powell also assured that the American economy was sufficiently “solid and well placed to face a monetary tightening”.
“Inflation has clearly surprised on the upside over the past year, and more surprises may lie ahead,” Jerome Powell warned during his annual hearing before a Senate committee, as rising prices reached a 40-year high in the United States at 8.6% over one year. He recalled that the Fed had raised key rates in the last three meetings, leading to a 1.5 percentage point increase in the cost of overnight credit. The Monetary Committee “expects rate hikes to continue”, he warned and their pace “will depend on economic data”. “We will make our decisions meeting by meeting,” said the boss of the Fed, assuring that the communication from the Central Bank would be “as clear as possible”. At its last meeting in mid-June, the Monetary Committee surprised the markets by deciding at the last minute to tighten the monetary screw by 75 percentage points, an increase not seen for almost 28 years. “We will strive to avoid adding uncertainty in what is already an extraordinarily difficult and uncertain time,” he pledged. But “in a rapidly changing economic environment, our policy has adapted and will continue to do so,” he explained.
Economy still “very solid”
Returning to the causes of inflation, Jerome Powell, who during his hearing will no doubt face criticism from the Republicans about the Fed’s monetary policy deemed too lax for too long, pointed to “the surge in crude oil prices resulting of the invasion of Ukraine by Russia” and “the confinements linked to Covid-19 in China”. “Inflation has also risen rapidly in many foreign economies,” he insisted. It was just announced on Wednesday at 9.1% over one year in May in the United Kingdom. Jerome Powell depicted an American economy that was still “very solid” and refrained from mentioning a recession.
“Indicators suggest that real gross domestic product growth accelerated this quarter, with consumer spending remaining strong,” he said, after a decline in GDP in the first quarter. On the other hand, he pointed to a slowdown in business investment and noted the cold snap that is gripping the real estate market “partly reflecting higher mortgage rates”. “The tightening of financial conditions (…) should continue to moderate growth and help to better balance demand and supply,” he said. The specter of a recession is increasingly invoked by economic players and experts who fear that by tightening too much the interest rates which condition all other credits, the Fed will not be able to achieve a soft landing. The White House itself is concerned about the risk of a recession but it also ensures that the fundamentals of the economy remain solid to face it. “It’s obviously a concern, but the backbone of our economy remains strong,” economic adviser Cecilia Rouse said Tuesday. Janet Yellen, the Treasury Secretary, assured for her part on Sunday that she did not believe that a recession was “inevitable”, conceding however to expect “that the economy will slow down” in the context of a transition. towards “slow and stable growth”.