Federal Reserve Chair Jerome Powell said Thursday it was possible US inflation could cool without a sharp rise in the unemployment rate.
At a Senate Banking Committee hearing, Senator Tina Smith, a North Dakota Republican, asked Powell if he “sees a way inflation can slow further without significant job losses and harming middle-class families.” add?” Powell replied, “I do.”
Powell said the job market is starting to cool and “that’s what we want to see.”
Economists say the US economy’s biggest surprise this year has been continued strength in the job market, despite the Fed’s rapid rate hikes over the past 15 months.
On the one hand, economists say the resilient labor market means the Fed’s tightening policy will result in a “soft landing” or “mild recession” for the economy.
But other economists worry that the strong labor market could ultimately make it harder to meet the central bank’s 2 percent target.
Harvard economist Jason Furman told the New York Times that there is a “bad scenario” in which the unemployment rate would need to rise closer to 10% to bring inflation back on target.
The unemployment rate is currently 3.7%, and Fed officials have forecast it to rise to 4.5% by the end of 2024.
Democrats on the Senate panel said they support the Fed’s decision to hold rates steady after raising rates at every meeting since last March.
“For the many of us who fear further rate hikes would do more harm than good, this is welcome news,” said Senator Sherrod Brown, the Ohio Democrat and chair of the Banking Committee.
Powell has said several times that a “strong majority” of Fed officials expect the Fed to initiate two more 25 basis point rate hikes by the end of the year. That would put the Fed interest rate in a range of 5.5% to 5.75%.
Responding to the senators’ concerns, Powell said the Fed is “trying to avoid the mistake of going too far.”
“It only makes sense to proceed at a cautious pace,” Powell added.
On the banking sector, Powell said the Fed works with small banks that focus on commercial real estate lending.
“We’re working with banks to master that,” Powell said.
The rapid collapse of Silicon Valley Bank in early March put the spotlight on the potentially painful losses banks face with trillions of dollars of commercial real estate loans on their books. Office building valuations have plummeted as many Americans continue to work from home.
Senate Republicans argued that the Fed’s plans to raise capital standards for banks following this spring’s bankruptcies would hurt the banking sector and result in lower lending to businesses.
“My question is: how much is too much? And when is enough enough? The higher the capital standards, the less capital there is for the private sector, which means less credit and less capital for those who actually create jobs,” said Senator Tim Scott, the senior Republican on the Banking Committee.
Powell said the Fed is still working on its plan to raise capital for banks. He said he doesn’t expect the final version to raise capital standards for banks with less than $100 billion in assets.
Senator Elizabeth Warren, a Massachusetts Democrat, said she doesn’t think Powell takes enough responsibility for the string of bank failures earlier this year.
In a heated exchange, Powell said he is focused on learning the right lessons to avoid a repeat of a major bank failure spreading to the banking system.
“My focus is on the future,” Powell said.
See also: The FDIC is considering a plan to bring smaller US banks into Basel III’s capital requirements after failing in early 2023