A hawkish Jerome Powell, testifying before Congress this week, made it clear that he is worried about recent economic indicators and is preparing to raise rates faster—and likely further—than previously anticipated.
Facing scrutiny from both sides of the political aisle, including on specific issues affecting housing markets, Powell described recent developments as a potential “reversal” of multiple months of positive data, and said explicitly that previous projections about interest rates peaking at about 5.5% were now up in the air.
“We look at the data since January and also to the revisions to November and December, and they suggest that the ultimate level of interest rates is likely to be higher than we expected,” said Powell.
Bond markets are now anticipating a 50-basis point rate hike at the Fed’s meeting later this month, according to Reuters.
Powell made it clear that the Fed had made no decision for its meeting, and would be deeply scrutinizing upcoming data—employment numbers released this Friday, and a Consumer Price Index (CPI) reading next week.
“They’re going to be important in our assessment of the higher readings that we have very recently received and of the overall direction of the economy, and of our progress in bringing inflation down,” he promised. “We’re not on a preset path.”
Wall Street reacted quickly to the news, with major stock indexes plummeting Tuesday before leveling off somewhat Wednesday and Thursday.
The historic pace of interest rate increases enacted last summer by the Fed has only been partly successful so far in achieving the central bank’s goals of “maximum employment” and bringing inflation down to around 2%. Unemployment is at a 53-year low, and between November and January, inflation seemed to be responding to policy decisions.
But that quickly changed in the early months of 2023, and an unexpectedly strong job report further frightened economists, potentially indicating that the economy was still running too hot.
Powell, in his testimony, affirmed that the labor market is still “extremely tight” and said the country was “very far” from achieving price stability.
“There is a mismatch between supply and demand. You saw that in housing prices going up over 40% since before the pandemic…we’re well aware that this particular situation involves a mix of forces, not all of which our tools can affect. But there is a job for us to do here in better aligning demand and supply,” Powell claimed.
Focused on housing specifically, Powell said that this aspect of prices—which contributes an outsized degree to core inflation—is already improving, mostly through lower rent costs.
“In the housing sector, we just need the time to pass so that recorded inflation comes down. It is effectively in the pipeline as long as new leases are being signed at relatively smaller increases,” Powell claimed.
Members of Congress further pushed Powell on specific housing issues, with Democrats honing in on how these policy decisions affected working people. Ayanna Pressley (D-Massachusetts) asked if Powell was specifically concerned about housing affordability and inequity caused by higher mortgage rates.
“This is putting homeownership further and further out of reach for…new parents, parents, millennials, people of color—contributing to inequities and the racial wealth gap. What are your thoughts on that?” Pressley asked.
Told that he was out of time for a response, Powell simply said that “you see the effect on housing” when interest rates are changed.
Sylvia Garcia (D-Texas) asked about institutional buyers snatching up housing stock in her district, and whether interest rate hikes have affected housing inequity.
“Inflation is hurting all your constituents, not just the housing sector,” Powell deferred. “It’s our job under the law to restore price stability.”
Senator Catherine Cortez Masto (D-Nevada) also pushed Powell on affordable housing, saying that people in her state have to work 75 hours a week at minimum wage in order to keep a roof over their heads.
“I often hear from Nevadans who say, ‘I don’t know if I’m ever going to own a home,’ and many feel resigned to being stuck in a cycle of renting,” she told him.
“We don’t really try to use our tools to affect broader housing policy, but really just to achieve our statutory goals,” Powell answered.
Perspectives and politics
A good amount of both hearings—spread across Tuesday and Wednesday in the Senate and the House—was taken up by posturing for an upcoming fight over the country’s debt ceiling, examining capital market issues and exploring government regulation of cryptocurrencies. Powell, while declining to participate in these mostly political debates, said he wanted to make it clear that the Fed could not protect the economy in the case of a debt default.
Much of the questioning focused on whether there was another option besides raising rates, with Democrats focusing on large corporations and income inequalities, and Republicans honing in on climate issues, as well as fiscal policy—something Powell denied was a major factor in inflation increases, at least in the present moment.
“I don’t think fiscal policy is a big factor right now driving inflation,” he said.
He also denied that ballooning executive pay or stock buybacks significantly affected inflation, but added that corporate margins would come down as inflation did.
Another issue Powell was pressed on was whether the Fed is intentionally trying to put Americans out of work and its attempt to decrease the imbalance between supply and demand in the labor market. He denied that this was a specific goal of the bank, saying that other shifts could rebalance the markets, and denied an assertion by Senator John Kennedy (R-Louisiana) that unemployment would reach 10.6% before inflation was tamed.
“I don’t think that kind of a number is at all in play here,” Powell said.
Pressley asked Powell explicitly if he would “pause future interest rate hikes” to avoid a recession, singling out the effect of inflation on lower-income people. Powell declined to give a yes or no answer.
“Vulnerable workers and families cannot afford to wait for you to realize the harm that you are doing,” Pressley asserted. “In my opinion, this sounds more like the assertions of a greedy corporation than someone who has a public mission on behalf of the people of this country.”
Senator Elizabeth Warren (D-Massachusetts) pointedly asked Powell to “speak directly to the 2 million hardworking people who have decent jobs today, who you’re planning on getting fired over the next year,” referring to the Fed’s own estimates that unemployment will reach 4.6% by the end of 2023.
“I would explain to people more broadly that inflation is extremely high, and it’s hurting the working people of this country, badly—all of them, not just 2 million,” Powell answered. “And we are taking the only measures we have to bring inflation down.”
“And putting 2 million people out of work is just part of the cost, and they just have to bear it?” Warren pressed.
“Even 4.5% unemployment is still well better than most of the time for the last 75 years,” Powell eventually responded.
