Fed Chairman: ‘If we have to raise interest rates more over time, we will’

Federal Reserve Chairman Jerome Powell told Congress Tuesday that if the pace of price increases do not come down, the central bank will get more aggressive with raising short-term borrowing costs.

“If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will,” Powell said in a Senate Banking Committee hearing.

Powell is facing the Senate for his renomination. President Joe Biden announced in November that he was tapping Powell for a second term at the helm of the central bank, with current Fed Governor Lael Brainard serving as vice chair (her confirmation hearing is scheduled for Thursday).

The stakes are high for the Fed this year, with inflationary prints showing prices rising at a clip of almost 7% on a year-over-year basis.

The Fed has spent the last year or so trying to figure out how much of those price increases are due to rising demand (which allows producers to raise prices) or constrained supply (in which COVID-disruptions increase the costs of production inputs).

Powell said both appear to be contributing to high inflation, but the Fed chief acknowledged that demand is “very strong” at the moment.

FILE – Federal Reserve Chairman Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill in Washington, Tuesday, Nov. 30, 2021. High inflation is taking a toll on American families, Powell acknowledged in remarks to be delivered at a congressional hearing on Tuesday, Jan. 11, 2022, where he is sure to face tough questions on the subject. (AP Photo/Andrew Harnik, File)

The Fed’s most potent tool remains interest rates, which the central bank has pinned to zero since the depths of the pandemic. Raising interest rates could address higher demand by making it more expensive to borrow. But higher borrowing costs likely would not do too much to address supply issues like shipping bottlenecks at the world’s ports.

“We can affect the demand side, we can’t affect the supply side. But this really is a combination of the two,” Powell said.

Time to pullback

Fed watchers say the central bank is moving quickly to pull forward its efforts to undo its pandemic-era easy money policies.

In addition to keeping zero interest rates, the central bank has absorbed trillions in U.S. Treasuries and agency mortgage-backed securities. The so-called quantitative easing program has served as a messaging device to markets on its intention to keep policies “accommodative.”

In the face of inflation, the Fed now plans on ending that program earlier than expected (with the current plan set to end all purchases by March). The Fed will then look to raising interest rates.

For the Fed, which also prioritizes the health of the labor market, a continued pace of monthly job increases has given policymakers confidence that they can tighten policies without disrupting hiring.

“It really is time for us to begin to move away from those emergency pandemic settings to a more normal level. It really should not have negative effects on the employment market,” Powell said.

Powell is expected to sail through confirmation, which will first involve vetting by the Senate Banking Committee followed by a full floor vote from the 100-member Senate.

Powell has had a record of securing bipartisan support through several administrations. A Republican by affiliation, Powell was confirmed to the Fed Board as governor during the Obama administration, securing a 74 to 21 vote in 2012. When Trump tapped Powell to replace Janet Yellen as the head of the Fed, Powell easily won confirmation in an 84 to 13 vote.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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