On Tuesday, Federal Reserve Chairman Jerome Powell warned lawmakers that the central bank would continue to increase the target federal funds rate as inflation continues to elevate.
Over the past year, policymakers have gradually hiked interest rates 4.5%, as monetary stimulus which was implemented during the lockdown-induced recession rolled back. Powell said that a robust labor market and persistent inflation in some product categories require further rate hikes, in remarks to the Senate Banking Committee.
“We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive,” he said. “We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Following the remarks, the Dow Jones Industrial Average fell 1.2%, and the S&P 500 Index fell 1%.
Rate hikes tend to increase borrowing costs for consumers and businesses, which leads to downward pressure on economic activity and price levels. Last month, Federal Reserve officials announced a 0.25% increase in the target federal funds rate, marking a slowdown from the previous 0.75% and 0.5% rate hikes. Currently, target interest rates sit between 4.5% and 4.75%.
Powell confirmed that the Federal Reserve intends to push for a 2% inflation rate, which had been largely maintained for three decades prior to the lockdowns.
Data from the Bureau of Economic Analysis revealed that the Personal Consumption Expenditures Price Index, the price level metric favored by the central bank, rose 5.4% between January 2022 and January 2023, while the version of the measure excluding more volatile food and energy categories rose 4.7% over the same timeframe.
“As supply chain bottlenecks have eased and tighter policy has restrained demand, inflation in the core goods sector has fallen,” Powell said in response to the data. “And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead.”
Among the most impactful on Americans in recent months has been food prices. At home, food expenses have increased by 11.3% between January 2022 and January 2023, according to Consumer Price Index data released by the Bureau of Labor Statistics, while costs for food away from home rose 8.2% over the same period.
In addition, a recent bout of avian flu has decreased the size of poultry flocks, raising costs for chicken and turkey, and prompting a severe increase in the price of eggs.
Meanwhile, Real wages, which account for the effect of inflation, decreased 1.5% between January 2022 and January 2023.
“Strong wage growth is good for workers but only if it is not eroded by inflation,” Powell told lawmakers.
President Joe Biden, meanwhile, who entered office while price levels were rising at a 1.4% rate, has expressed confidence in the economy over the past several months as headline inflation declined.
“When I travel the country, I see optimism for this year and the years ahead,” the commander-in-chief said in a statement from the White House. “We must finish the job in transitioning to stable and steady growth that benefits all Americans, while laying the foundation for strong and shared growth for years to come.”
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