Jerome H. Powell, the Federal Reserve chair, told lawmakers on Tuesday that a rapidly healing economy no longer needed as much help from the central bank and that keeping inflation in check — including by raising interest rates — would be critical for enabling a stable expansion that benefited workers.
Mr. Powell, whom President Biden recently nominated for a second term as chair, is confronting a complicated economic moment as he moves toward another four-year stint as head of the world’s most powerful central bank. He provided his latest thoughts on the Fed’s challenge during his confirmation hearing before the Senate Banking Committee.
The economy is growing swiftly, but it has been buffeted by repeated waves of the coronavirus and by a surge in inflation that has proved stronger and longer lasting than economists expected. Workers are finding jobs and winning wage increases, but the rising costs of housing, gas, food and furniture are pinching shoppers and tanking consumer confidence.
The Fed is charged with maintaining price stability, and its officials have recently signaled that they could raise interest rates several times this year to try to cool the economy and prevent rapidly rising prices from becoming permanent. Mr. Powell — who is widely expected to win confirmation — reiterated that commitment on Tuesday.
“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Mr. Powell said.
But the central bank also has a second mandate: It is supposed to guide the economy toward full employment, a situation in which people who want to work and are able to do so can find jobs. Cooling off the economy can slow hiring, so trying to foster a strong labor market and trying to set the stage for a strong labor market can require a balancing act for policymakers.
Mr. Powell squared the two goals in his testimony, suggesting that keeping price gains under control would be critical for achieving a sustainably strong labor market.
“High inflation is a severe threat to the achievement of maximum employment,” he said.
If rapid price gains start to become “entrenched in our economy,” the Fed might have to react starkly to choke off runaway inflation and risk touching off a recession, Mr. Powell said. To avoid a painful policy response and instead set the stage for a strong future labor market, he added, it is important to control inflation.
“If inflation does become too persistent, if these high levels of inflation get entrenched in our economy, and in people’s thinking, then inevitably that will lead to much tighter monetary policy from us, and it could lead to a recession, and that would be bad for workers,” Mr. Powell said.
Economists increasingly expect Fed officials to make three or four interest rate increases in 2022, moves that would make borrowing expensive for households and businesses and slow down spending and growth. That could, in turn, weaken hiring, keep wages from growing as swiftly and hold down prices over time as people shop less.
The Fed’s rate increases would come on top of other moves intended to keep the economy from overheating: Officials are slowing down the big bond purchases they had been using to lower longer-term interest rates and stoke growth, and policymakers have signaled that they may begin to shrink their bond holdings this year.
They could do that passively, allowing bonds to mature without reinvesting, or they could sell assets. Mr. Powell left the door open to either possibility on Tuesday. If the Fed trims those balance sheet holdings, that will reinforce the move higher in interest rates, cooling the economy further.
“The committee hasn’t made any decisions about the timing of any of that — I think we’re going to have to be both humble and a bit nimble,” Mr. Powell said.
He noted that all members of the Fed’s policy-setting committee expected to raise interest rates this year, but the number of increases will depend on how the economy evolves. Officials have made clear that higher borrowing costs could come soon.
Loretta Mester, president of the Federal Reserve Bank of Cleveland and an official who has traditionally favored more interest rate increases than many of her colleagues, said on Bloomberg Television on Tuesday that she would favor beginning rate increases in March and that she expected three moves this year. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, also indicated in an interview with Reuters that a March policy rate change could be appropriate.
The prospect of rising interest rates has unnerved stock investors lately. Higher rates discourage risky investments like stocks, and can curb corporate profit growth. Wall Street’s major benchmarks moved between losses and gains on Tuesday as Mr. Powell spoke.
The Fed’s recent and decisive move toward inflation-fighting mode could be shored up by an inflation report, slated for release on Wednesday, that is expected to show the fastest growth in consumer prices since June 1982.
Mr. Powell emphasized that inflation has been high both because consumer demand for goods has been strong and because supplies of goods and services have been seriously disrupted: The pandemic has shut down factories, shipping routes haven’t been able to keep up as consumers buy more imported goods, and companies have in some cases struggled to hire workers to expand production and services.
The Fed can help to cool demand with its tools, but it is also hoping that supply bounces back as companies learn to live with the new backdrop the pandemic has created, Mr. Powell said.
Keeping inflation under control is “going to require us to use our tools, to the extent that they work on the demand side, while we also expect some help from the supply side,” he said.
Still, predicting the trajectory for inflation has been a fraught task during the pandemic. The Fed had initially forecast that inflation would pop early in 2021 and then fade, but policymakers — like many private sector forecasters — got that wrong.
“We’re not really seeing, yet, the kind of progress essentially all forecasters really thought we’d be seeing by now,” Mr. Powell said, at least when it comes to snarled supply chains.
“People want to buy cars — carmakers can’t make any more cars, because there are no semiconductors,” he said, emphasizing what an unusual period the pandemic has been. “That’s never happened.”
Some Republicans, including Senator Patrick J. Toomey of Pennsylvania, worried that the Fed might have moved too slowly to counteract price gains in part because of a new, employment-focused policy approach Mr. Powell ushered in.
“I worry that the Fed’s new monetary policy framework has caused it to be behind the curve,” Mr. Toomey said. But he then praised the Fed for adjusting its stance as conditions have evolved and as inflation has shown signs of sticking around.
Investors do not seem to share the concern that the central bank will be unable to wrestle the situation back under control, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. She noted that inflation expectations priced into financial assets had been stable, as investors looked for about four rate increases this year.
Markets “at least believe they are going to be able to raise rates and curb the risk of runaway inflation,” she said.