Washington- Federal Reserve Chairman Jerome Powell’s testimony a few days ago before the Senate and House of Representatives included warnings against resorting to raising interest rates faster than previously expected in order to stabilize prices and control inflation.
The Fed chairman spoke – the day before yesterday – before the Senate Banking and Housing Committee, and went back to repeat what he said before the House Financial Services Committee on Wednesday.
During the past year, the Federal Reserve raised the benchmark interest rate 8 times to its current target level between 4.5% and 4.75%, and this percentage determines the interest rate on funds that banks impose on each other, but it greatly affects other consumer debt products such as mortgages Real estate, car loans and credit cards.
The next interest rate hike
Powell warned that interest rates are likely to head higher than central bank policymakers expected, and said that government reports on employment and inflation through February ending, scheduled for release next week, will strongly influence the interest rate decision at the Federal Reserve meeting on February 21. and 22 March.
He said the Fed would consider raising its benchmark interest rate by half a percentage point later this month, and many analysts had expected another increase of just a quarter of a percentage point.
“If the latest economic data is stronger than expected, this indicates that the final level of interest rates is likely to be higher than previously expected,” the Fed Chairman said.
“If the aggregate data indicates that a faster tightening is warranted, we would be prepared to increase the pace of interest rate hikes,” he added.
And economic data announced in recent weeks indicate that “the final level of interest rates is likely to be higher than previously expected, and the result is that interest rates will not only rise higher than we previously expected, but there is much less room to cut interest rates later than this.” year than we originally thought,” Powell said.
Over the past year, the Fed raised its benchmark interest rate to more than 4.5% – the highest rate since 2007 – in response to rising prices (inflation) at the fastest pace in decades, and the country’s inflation rate reached 6.4% in January.
While this is lower than it was during the previous months, it is still much higher than the 2% rate that is considered healthy for the US economy, and raising interest rates to 5% will automatically mean raising borrowing costs, which is one of the most important mechanisms to slow the price rise in the economy. in general.
By pursuing a policy of raising borrowing costs, Fed officials hope to reduce demand for loans to expand businesses, homes and other purchases, eventually cooling the economy and relieving upward pressure on prices.
These moves have already led to a sharp slowdown in interest rate sensitive areas of the economy, such as the housing market.
The Fed chief concluded by saying that “a lot of areas have been covered, and the full effects of our tightening have not yet been felt. However, we have more work to do, and the road may be bumpy.”
Stock market
Powell’s hawkish remarks pushed US stock indices sharply lower on Tuesday and Wednesday, and this news shocked investors, as all major indices fell sharply, and market expectations rose to raise interest rates by half a point.
Treasury yields also rose, the two-year note reached its highest level since 2007, and the two-year Treasury yield fell below the 10-year Treasury yield, a sign that investors are worried about the immediate economic future.
In early trading on the US Stock Exchange, the Dow Jones Industrial Average fell by 1.6%, while the Standard & Poor’s 500 Index fell by 1.4%, and the Nasdaq fell by nearly 1%.
Gambling with people’s lives
Powell’s testimony sparked a lot of opposition among lawmakers, especially those on the left in the Democratic Party, who said the moves would do little to address inflationary causes, such as the war in Ukraine and supply chain issues, while triggering an economic slowdown that would put millions of people out of work. .
Democratic Senator Elizabeth Warren, of Massachusetts, also blamed the inflation problem on price gouging by companies, and the Fed chairman responded that the economy would be in worse shape if the central bank did not act, but Warren accused him of misdiagnosing the cause of inflation and endangering livelihoods. Millions of Americans needlessly risked the Fed’s eight increases over the past 12 months as “the most extreme rate-raising cycle in 40 years.”
On the other hand, some members feared that Washington would soon default on its debts in the middle of next summer if Congress did not address the debt ceiling law, but Republicans demanded that any such step be accompanied by sharp spending cuts.
For his part, Democratic Senator Robert Menendez of New Jersey asked, “Isn’t even this constant fighting that questions the possibility that the United States will not honor its full faith and credit have consequences within the economy?”
The Fed chair responded confidently, saying, “In principle, it could, but I think the markets and observers are inclined that it has worked in the past, so it should work this time.”
