Jerome Powell, the chairman of the Federal Reserve, stated that the US government debt is on a “unsustainable path,” admitted that he had overestimated the threat of inflation, and spoke of the possibility of a recession.
On Thursday, Powell made his comments during hearing before the House Financial Services Committee, capping off a second day of visits on Capitol Hill for the influential Fed head.
The debt is increasing faster than the economy, which indicates that the US is on an unsustainable fiscal path, according to Powell. “That is, by definition, unsustainable.”
According to Powell, the US is currently able to service its debt without difficulty. However, even though a default is not currently imminent, ultimately, government debt will need to fall back below economic growth.
“We must return to a position where revenues and spending are more evenly distributed. We merely need the economy to grow faster than the debt over a longer period of time; we don’t need to pay the debt down, he said.
This week, Powell was under fire mostly due to the issue of inflation, which has risen to a 40-year high. The consumer price index increased by 8.6 in May from a year earlier, which is the quickest rate since 1981.
After arguing for much of last year that increasing prices were just temporary, Powell acknowledged in his remarks on Thursday that the Fed had “underestimated” the threat of inflation.
“We underestimated it, I guess. With the benefit of hindsight, it is obvious that we did,” Powell said, noting that the central bank had made a mistake in assuming that disruptions to the supply system would be rapidly handled.
Due to a combination of variables, including soaring consumer demand clashing with supply chain disruptions and labor shortages as the economy recovered from the pandemic, inflation has been on the rise for the past year.
Many committee Republicans stressed during Thursday’s hearing that President Joe Biden’s $1.9 trillion stimulus package last year added heat to an already sizzling economy.
The Fed has started acting forcefully after being hesitant to realize the threat of inflation.
It increased its benchmark short-term interest rate by three-quarters of a percentage point last week, which was the biggest increase since 1994, and it has hinted that other significant rate increases are on the way. Rate increases were also made in March and May.
Borrowing money for homes, vehicles, and other durable goods will become more expensive for consumers and businesses as a result of those rate rises.
Powell argued that Americans had faith in the Federal Reserve, citing consumer mood indicators that demonstrate the majority belief that inflation will eventually decline.
On the second of two days of hearing for the Fed’s semi-annual report to Congress, Powell told the House Financial Services Committee that “people do expect inflation to come back down to levels that are consistent with our price stability objective.”
But a test like this has never been conducted. It has been a while since we experienced sustained high inflation. As a result, it is not a comfortable location.
The Fed is attempting the high-risk task of easing the American economy into what is known as a “soft landing” by hiking rates and slowing the economy down sufficiently to control inflation without plunging it into a recession.
Powell had admitted to the Senate Banking Committee on Wednesday that a recession is still conceivable as the Fed raises interest rates.
It’s not what we were going for, he said. But there is definitely a chance for it.
Powell emphasized on Thursday how crucial it is to reassuring the public that inflation can be controlled.
He told the House committee that “inflation expectations remain grounded.” That is good, yet it is insufficient. These expectations will unavoidably come under pressure over time, thus we need to reduce inflation.
He reiterated the Fed’s commitment to managing inflation as being “unconditional,” adding that the Fed would do whatever it took to achieve.
We must succeed on this, he urged. “We absolutely need to bring inflation down to 2%.”
Powell acknowledged that there was a chance that the Fed’s policies could cause unemployment to increase when being questioned by members of the House subcommittee on Thursday. In May, the unemployment rate in the US was 3.6 percent.
He explained that because we lack precision equipment, there is a chance that unemployment would increase from its currently low level. A labor market with an unemployment rate of 4.1% or 4.3% is still quite healthy.
However, Powell also stated that despite a slow start to 2022, he anticipates economic growth to perk up in the second half of the year.
Price pressures have been increasing for months, prompting the Fed to tighten financial conditions even more in an effort to reduce demand while also holding out hope that some supply chain problems will start to resolve themselves over the coming several months.
The Federal Reserve announced last week that it would increase its policy rate to 3.4 percent by the end of the year, which would be the largest increase in the benchmark overnight interest rate since 1994.