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Fed's Powell weighs on recession risks, reaffirms commitment to aggressive rate hikes

Kitco News

(Kitco News) The U.S. central bank is "strongly committed" to bringing inflation under control and is moving "expeditiously" to do so, said Federal Reserve Chair Jerome Powell.

Powell reaffirmed his commitment to the Fed's aggressive rate hike plan in light of stubbornly high inflation.

"My colleagues and I are acutely aware that high inflation imposes significant hardship," Powell testified before the Senate Banking Committee. "Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy."

The Fed is now "highly attentive" to the risks high inflation poses and understands "the full scope of the problem," which is why it is using its tools to address that "pretty vigorously," Powell described to U.S. Senators Wednesday.

The decision to raise rates by 75 basis points in June reflects that thinking. "We thought it was appropriate to move more aggressively," Powell said. "Right now, the labor market is unsustainably hot. On the inflation side, we are far from our target. We have to restore price stability in order to have a sustained period of maximum employment in the longer term. Don't think we need to provoke a recession but essential to restore price stability."

Powell noted that the available inflation data for May suggests that the core measure likely held at the same level or eased slightly. But several key inflation triggers remain outside the Fed's control — Russia's invasion of Ukraine, supply chain disruptions, and effects of COVID-related shutdowns in China.

"The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation. And COVID-19-related lockdowns in China are likely to exacerbate ongoing supply chain disruptions," Powell explained. "I don't expect we've seen the full effects of China lockdowns … As long as the zero-COVID policy is in place, you can have a relapse."

Powell also did not rule out more surprises when it comes to inflation, stating that the economy often evolves in unexpected ways. "Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," he said.

Live 24 hours gold chart [Kitco Inc.]

Recession risk 'not elevated right now'

In terms of recession risks, Powell reiterated that the American economy is "very strong" and is well-positioned to handle tighter monetary policy. He added that the likelihood of a recession is "not particularly elevated right now."

The Fed chair explained that the intention is to achieve price stability without triggering a recession. "Events of the last few months have made that more challenging. There are paths that could make it happen," Powell said. But inflation will depend on how long the war in Ukraine lasts and how long it takes to restore supply chains.

Several U.S. Senators grilled Powell on how raising rates actually fights inflation, referring to rate hikes as "blunt" instruments. The Fed chair responded that the goal of hiking rates aggressively is to lower demand growth.

"When interest rates go up, people's demand will moderate or decline, so supply and demand can get into better balance. Asset prices will moderate as people spend less. As rates go up, the dollar would strengthen," he described. "We don't know if demand needs to go down, which would be a recession. We are slowing down growth to help bring demand into better balance with supply."

Democratic U.S. Senator Elizabeth Warren challenged the effectiveness of the Fed's rate hikes. Warren asked whether rate increases would help lower food or gas prices. To which Powell admitted that they wouldn't.

"You know what's worse than high inflation with low unemployment?" Warren asked. "High inflation and a recession with millions of people out of work … I hope you consider that before you drive the U.S. economy off a cliff."

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According to Powell, the most recent inflation numbers suggest that the Fed needs to accelerate rate hikes to get to the longer-run neutral rate level faster. The Fed sees rates between 3% and 3.5% in six months.

When asked about the price meltdown in the crypto space over the past week, Powell said that he hadn't seen any significant macroeconomic implications. "The principal implication is that in this very innovative new space, there is a need for a better regulatory framework … Many digital products are the same products that exist in financial markets but are not regulated," he said.

Powell also compared stablecoins to an unregulated money market fund. "The world of stablecoins is new and doesn't have the fit-for-purpose regulatory scheme that it needs to."

He told U.S. Senators that Congress would need to clarify who has authority over what when it comes to crypto and stablecoins. "The Fed regulates and supervises banks. We have a say in what Fed's regulated banks do with crypto assets on their balance sheet," Powell added.

Throughout Powell's testimony, gold was able to hold the $1,840 an ounce level and at one point traded near daily highs. August Comex gold futures were last at $1,840.60, up 0.10% on the day.

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