Federal Reserve Chair Jerome H. Powell acknowledged in an interview with Marketplace on Thursday that the central bank could have moved faster to raise interest rates and cut inflation, as the central bank comes under increasing scrutiny over whether it waited too long to act on prices.
Powell’s comments mark a sharper sentiment of regret than his past remarks when it comes to whether the Fed should have stepped in sooner. The Fed has faced criticism, primarily from Republicans and some prominent economists, such as Lawrence H. Summers, for delaying interest rate hikes and ending stimulus-era financial supports, which work together to cool off the economy and bring inflation down.
Powell, who was confirmed by the Senate for a second term as Fed chair earlier Thursday, lost a handful of votes from lawmakers who said their constituents were suffering too much from high prices on his watch.
For much of the last year, the Fed stuck to its message that rising inflation would be “transitory,” or temporary, and more limited to pockets of the economy hit hard by the coronavirus pandemic and related shutdowns and supply chain disruptions.
As the months went by, inflation sank deeper into the economy, and people increasingly felt the strain in their daily lives, especially with food, energy and shelter. By the end of 2021, the Fed backed off from its “transitory” message and has since worked to reassure Americans that their pain is not going unnoticed. In an unusual step, Powell began a news conference last week by saying he wanted to “take this opportunity to speak directly to the American people.”
“It’s our job to make sure that inflation of that unpleasant high nature doesn’t get entrenched in the economy,” he said at the news conference. “That’s what we’re here for … perhaps the most fundamental thing we’re here for.”
Now, with inflation at 40-year highs, the Fed faces the tremendous task of slowing down the economy without cooling off the economy too much and causing a recession. The main tool for the Fed to slow down the economy is through interest rates, which work with blunt force. Higher rates make an array of loans costlier for households and businesses, and they can eventually slow consumer spending and business investment.
But rates that go up too high and too fast can choke off the recovery and cause people to lose their jobs.
The Fed has planned seven interest rate hikes this year that it hopes can slow the economy just the right amount. Last week, the Fed enacted the second of those increases, opting for a more aggressive hike of half a percentage point.
At a news conference following that decision, Powell said an even sharper increase — three-quarters of a percentage point — was “not something the committee is actively considering.” He instead set expectations for more increases of half a percentage point in the coming months.
But speaking to Ryssdal, Powell clarified his remarks and appeared to reopen the door to more forceful rate hikes, if need be.
“We thought that if the economy performs about as expected, that it would be appropriate for there to be additional 50-basis-point increases at the next two meetings,” Powell said. “But I would just say, we have a series of expectations about the economy. If things come in better than we expect, then we’re prepared to do less. If they come in worse than when we expect, then we’re prepared to do more.”