Elizabeth Warren, Federal Reserve Chair Jerome Powell: Don’t push this economy off the cliff

“I wouldn’t say that, no,” Powell said.

Warren expressed concern about the impact of Fed rate hikes on households and the risk of a recession.

“Raising prices won’t make Vladimir Putin flip his tank and leave Ukraine,” Warren said, adding that it won’t break up corporate monopolies or stop Covid-19.

Warren said raising interest rates would, however, increase household borrowing costs and cause job losses.

“Inflation is like a disease and the medication has to be adapted to the specific problem, or else it might make things worse,” Warren said. “Right now, the Fed does not control the main drivers of higher prices, but the Fed can slow demand by throwing out a lot of people and making households poorer.”

The Massachusetts Democrat urged Powell to proceed with caution in raising interest rates.

“Do you know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work,” Warren said. “I hope you think about that before you push this economy off the cliff.”

Senators on both sides have sought to blame rising inflation on a variety of factors, including pandemic stimulus, wage growth and increasing corporate prices. However, Powell refused to interfere in any of those heated political issues.

“I’m really focused on what we can do, which is shrink our balance sheet, raise interest rates, bring supply and demand back into alignment, and bring inflation back to 2%,” he said.

The Fed pledged to tame inflation

Powell acknowledged that the cost of living was hurting Main Street financially and expressed confidence that the US economy could weather this difficult period.

“At the Fed, we understand the difficulties that high inflation causes,” Powell said in prepared remarks during the Senate Banking Committee hearing on Wednesday. “We are strongly committed to bringing inflation back down, and we are moving quickly to do so.”

Powell, whose remarks echoed what he made last week at the Fed meeting, said officials plan to continue raising interest rates to control inflation. The Fed rate hike last week was the largest since 1994.

“The US economy is very strong and well-positioned to deal with tighter monetary policy,” the Fed chief said.

Powell faces questions about why the Fed waited until March to raise interest rates and why it felt the need to speed up rate hikes.

In his remarks, Powell indicated that monetary policy requires recognition that the economy often develops in “unexpected” ways. He said supply constraints were “bigger and longer lasting” than expected and that the war in Ukraine had driven up energy prices.

“Inflation has clearly surprised the upside over the past year, and there could be other surprises in store,” Powell said. “So we need to be smart in responding to incoming data and evolving forecasts.”

Recession is “definitely a possibility” but not the goal

When asked if a rate hike could lead to a pullback, Powell said that was a “certain possibility,” but stressed that it was not the Fed’s “intent.”

Powell acknowledged, however, that the stakes are rising.

“Honestly, the events of the past few months have made it even more difficult to achieve what we want, which is 2% inflation and a strong labor market,” Powell said.

The Fed chair later said he did not believe a recession would be necessary to tame inflation.

“I don’t think we’re going to need a recession, but we do think it’s absolutely necessary to restore price stability, really for the benefit of the labor market like anything else,” he said.

Home prices should finally begin to stabilize

Powell, whose policies helped create a historic boom in the housing sector, expects home price gains to decline due to higher mortgage rates.

He told lawmakers that aggressive rate increases by the Fed are already slowing the housing market, undermining demand for homes.

“House prices should stop rising at such a remarkably rapid rate,” Powell said. “Since the start of the pandemic, we’ve had a very hot housing market across the country. With housing demand moderating… you should see prices stop going up.”

One reason for the rising house prices was lower borrowing costs and the Federal Reserve’s purchase of hundreds of billions of dollars in mortgage bonds.

Although he expects prices to fall, Powell cautioned that the Federal Reserve does not control the supply of homes, and said homebuilders have warned of supply constraints. “It’s not something the Fed can do anything about,” he said.

Another complication is that high mortgage rates – rising at the fastest pace since 1987 – will hurt some people who want to buy homes.

“There is some pain involved for people who pay higher mortgage rates,” Powell said. “Some people are going to be priced out of the mortgage market, but that is what ultimately has to happen if we are to return to price stability, to a place where people’s wages are not being devoured by inflation…the biggest pain if we allow this high inflation to continue.”

Additional reporting by Alicia Wallace