Fed reiterates commitment to fight inflation in the U.S.; new interest rate hike expected in July

Federal Reserve Chairman Jerome Powell called his commitment to curbing inflation “unconditional” and another of his colleagues backed raising interest rates by 75 basis points again next month, even as Democrats warned him about the risk of triggering a recession.

“We have a labor market that is unsustainably hot and we are way off our inflation target,” Powell told the House Financial Services Committee on Thursday during his second day of semiannual congressional testimony. “We really need to restore price stability, get inflation back down to 2 percent, because without that we can’t have a sustained period of maximum employment.”

Policymakers raised interest rates by 75 basis points last week and Powell signaled that another increase of that magnitude, or a 50 basis point hike, was on the table when they meet again in late July.

Fed Governor Michelle Bowman also said in remarks before bankers in Massachusetts that she supports raising rates by 75 basis points next month and continuing with increases of at least 50 basis points after that until price pressures cool.

Powell and her colleagues have made a sharp turn toward a tighter stance to fight the highest inflation in 40 years in the U.S. amid criticism that they acted too late to tighten monetary policy as the economy recovered from COVID-19. They have raised rates by 1.5 percentage points this year and central bankers forecast about 1.75 additional points of cumulative tightening in 2022.

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Is a U.S. recession looming?

The move has rattled financial markets as investors fear the Fed could trigger a recession. Powell told lawmakers Wednesday that such an outcome was “certainly a possibility,” though it is not something the Fed is looking for or believes is necessary to bring inflation down to the central bank’s 2 percent target.

Powell repeated that the Fed still hoped to achieve a soft landing, though he acknowledged it was going to be difficult.

“That has become significantly more challenging given the events of the last few months, particularly the war, which is raising gasoline prices,” he told the House panel. “We don’t think a recession is inevitable.”

Rising prices angered Americans and hurt Democrats’ standing among voters ahead of the November congressional elections.

Consumer prices rose 8.6 percent last month from a year earlier, according to the Labor Department. June CPI data will be released on July 13, two weeks before the Fed begins its next meeting.

The central bank points to a separate lagged Commerce Department gauge that registered inflation three times faster than the Fed’s 2 percent target, according to its latest reading.

Powell received support for the Fed’s tightening stance mainly from Republicans, while Democrats argued that raising rates would make no difference to high gasoline or food prices but could put millions of Americans out of work.

The Fed chief said it was possible to reduce inflation without hurting the labor market and that the goal was to ease demand, not cause unemployment.

“Our tools are blunt, but they are the right tools to deal with broad aggregate demand,” he said.