Hot inflation data could lead the Federal Reserve to raise interest rates to higher levels and at an accelerated pace, Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on Tuesday.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell said in his opening statement. “As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Powell said that some consumer spending in January may have been higher because of relatively warm weather, but “the breadth of the reversal, along with revisions to the previous quarter, suggests that inflationary pressures are running higher than expected at the time of our previous [Federal Open Market Committee] meeting.”
Sen. Mark Warner, D-Va., asked Powell about the potential risks to the financial system from the large amount of vacant commercial office space as part of the hybrid work transition coming out of the COVID-19 pandemic.
“The occupancy of office space in many major cities is just remarkably low, and you wonder how that can be,” Powell said. “Over time, some of that’s going to be made into condominiums and things like that, since we don’t seem to have quite enough housing in some places, but the question is what’s the financial stability risk?”
Powell said that a lot of large financial institutions had limited exposure.
“We agree that that’s an area that requires a lot of monitoring,” Powell said, noting that some smaller banks have significant exposure in the commercial real estate business, perhaps more than the large banks. “I’d say we’re on the case.”
Powell also backed the idea of adopting the “same activity, same regulation” model for regulation of both banks and nonbanks, including with cryptocurrencies.
“People are going to assume, when they deal with something that looks like a money market fund, that it has the same regulations as a money market fund or a bank deposit,” Powell said. “Stablecoins need some attention in that respect. I just think that’s the basic principle.”
A significant chunk of the committee’s questioning was about how ongoing interest rate increases would lead to higher unemployment, with different approaches to the issue coming from Republican Sen. John Kennedy of Louisiana and Democratic Sen. Elizabeth Warren of Massachusetts.
“I’m not being critical — when you’re slowing the economy, you’re trying to put people out of work. That’s your job, is it not?” asked Kennedy.
“Not really. We’re trying to restore price stability,” Powell said, adding that an increase in job openings could also show the needed realignment in labor supply and demand.
Debt limit discussion
Sen. Bob Menendez, D-N.J., after highlighting his call for President Joe Biden to nominate a qualified Latino candidate to join the Board of Governors of the Federal Reserve, asked Powell about the potential economic effects of not raising the debt limit.
“I’m getting a sense of déjà vu because once again, Republicans are recklessly demanding draconian spending cuts to programs that hardworking U.S. families rely on, in exchange for allowing the Treasury Department to pay for spending that Congress, including most of them, had already voted to authorize,” Menendez said.
“These are really matters between the executive branch and Congress,” Powell said. “We do not seek to play a role in these policy issues, but at the end of the day there’s only one solution to this problem … Congress really needs to raise to raise the debt ceiling. That’s the only way out in a timely way that allows us to pay all of our bills.”