The Federal Reserve will keep raising rates until it sees “compelling evidence” that inflation is coming down, the Fed chair, Jerome Powell, told Congress on Wednesday.
The US is wrestling with rates of inflation unseen in 40 years and Powell warned that “further surprises could be in store”.
“Over coming months, we will be looking for compelling evidence that inflation is moving down,” Powell said. “We have both the tools we need and the resolve it will take to restore price stability.”
Last week the Fed raised interest rates by 0.75 percentage-points – the largest hike since 1994. Powell and other Fed officials have signaled that further outsized increases are in the works as they try to drive inflation down to their 2% target from the current annual rate of 8.6%.
The Fed’s benchmark federal-funds rate is currently in a range between 1.5% and 1.75% and expected to rise above 3% this year. The increase has already led to a spike in mortgage costs. A 30-year fixed-rate loan now costs close to 6%, up from 3.25% at the start of the year.
Powell said rate rises were needed in order to bring demand down and soften price increases. But he admitted that many of the drivers of inflation, including the war in Ukraine’s impact on energy prices and soaring food costs, were beyond the control of the Fed.
Senator Elizabeth Warren criticized the Fed’s rate moves. Gas and food prices will not fall because of the rate increases, she argued. “Rate hikes won’t make Vladimir Putin turn his tanks around and leave Ukraine,” she said. “I hope you’ll reconsider this before you drive this economy off a cliff.”
Raising rates would “make it more expensive to invest which in turn is going to throw people out of work and when they are out of work they will have less money to spend”, she said.
Former treasury secretary Larry Summer has argued the US needs unemployment, currently 3.6%, to rise to 5% for five years to contain inflation.
Powell said he would have “a lot of humility” about forecasting where the economy was heading over the next five years. “But there are certainly paths to get inflation down to 2% with outcomes that are less troubling,” he said.