Federal Reserve Chair Jerome Powell testifies in a confirmation hearing before Congress. Powell says, “we will raise interest rates if we have to.” The confirmation hearing is in light of Powell running the Fed for a second four-year term.
Fed Powell suggests raising interest rates to tackle high inflation
Former President Trump nominated fed Powell to be the Federal Reserve Chair. Four years later, President Biden renominated Fed Powell for the same position.
The pandemic has caused severe inflations globally, posing a threat to the job market. Fed Powell said the Central Bank would have to raise interest rates to combat persistently elevated inflation levels.
Fed Powell says, “We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation.” “If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will.”
The rising demand and restricted supply are contributing to high inflation. Fed Powell acknowledged that the demand is “very strong” in the current situation.
The pandemic has caused an increase in costs of production inputs allowing producers to manipulate prices. The Central Bank had cut down the interest rate to zero since the pandemic. Nevertheless, the Fed will use interest rates as a tool to control the demand side.
Why is raising interest rates necessary to return to normalcy?
The Central Bank has agency mortgage-backed securities and trillion in U.S. Treasuries as a quantitative easing program. However, as inflation soars, the Feds plan to end the program sooner rather than later.
All current purchases will come to a halt by March, and the Feds will begin the process of raising interest rates.
Fed Powell says, “It really is time for us to begin to move away from those emergency pandemic settings to a more normal level. It really should not have negative effects on the employment market.”
The Central Bank is actively accelerating to undo its pandemic-era easy money policies. Fed Powell also said, “We’re really going to be moving over the course of this year to a policy that’s closer to normal. But it’s a long road to normal from where we are.”
Effects of raising interest rates on the stock market
As Fed Powell testifies before Congress, the stock market took a positive spin. While the Dow Jones Industrial Average suffered a loss of 250 points after Fed Powell’s testimony, his comments raised all three indexes.
The S&P 500 and Nasdaq Composite positively rose to 0.5% and 1.3%, respectively.
As per the U.S. Labor Department, the consumer price index has witnessed the fastest annual pace in almost 40 years. By the end of November, the Index rose to 6.8% in the 12 month period.
As President Biden nominates new governors, Fed Chair and Vice-Chair, the pressure increases to tackle high inflation. Fed Powell is most likely to run the second four-year term as Federal Reserve Chair.