Fed Chair Powell Says Interest Rate Hikes Needed To Lower Inflation

U.S. Federal Reserve (Fed) Chairman Jerome Powell said that the U.S. economy is in need of tighter monetary policy.

As part of his second term confirmation hearing before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Powell said he expects a series of interest rate hikes this year, along with other reductions in the extraordinary help the Fed has been providing to the U.S. economy during the pandemic.

“As we move through this year … if things develop as expected, we’ll be normalizing policy, meaning we’re going to end our asset purchases in March, meaning we’ll be raising rates over the course of the year,” he told committee members. “At some point, perhaps later this year, we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.”

Higher interest rates control inflation by slowing down the flow of money, which has been running rapidly through the economy as the Fed and Congress have combined to provide more than $10 trillion U.S. worth of stimulus.

“If we see inflation persisting at high levels longer than expected, then if we have to raise interest more over time, we will,” Powell said. “We will use our tools to get inflation back.”

In addition to rate hikes, the Fed also is tapering its monthly bond purchases, which have added more than $4.5 trillion U.S. to its balance sheet since the early days of the pandemic.

Officials also have indicated they will start decreasing the balance sheet later this year, mostly likely by allowing a set level of proceeds to run off each month, though the Fed also could sell assets outright.

Powell said the moves are in response to a U.S. economy that has both a strong jobs picture, with an unemployment rate at 3.9% in December, but with inflation expected to top 7% year over year for the same period.