Powell Faces Historic Challenge: Fight Inflation and Avoid Recession
Federal Reserve Chair Jerome Powell is facing a Herculean task as he testifies before Congress this week: to fight inflation with the sharpest interest rate increases since the 1980s without tipping the U.S. economy into a recession. On Tuesday, Powell warned the fight against inflation still has “a long way to go,” sending stock markets lower.
Powell told lawmakers that inflation, while declining, could remain elevated for some time. He also noted that the Fed will be “prepared to increase the pace of rate hikes” if the data indicates that faster tightening is warranted.
His comments come as the markets are pricing in a 69.4% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. About 33% of traders expect the Fed to increase the federal funds rate by another 75 basis points by the end of the year, while 64% expect rates to increase by 50 basis points.
The 10-year Treasury yield increased by one basis point to 3.995% on Tuesday morning. Currently, the yield on the U.S. 10-year Treasury note is 3.972%. The yield on the two-year note has risen above 5%, reaching 5.038%, for the first time since 2007.
The difference between the yield on 2-year and 10-year Treasury notes is currently the biggest it has been in In the past, when the Treasury yield curve was inverted, it was a sign of difficult economic times in the United States.
Powell responded to criticism from U.S. Senator Elizabeth Warren, saying inflation hurts everyone, and that the Fed would not be doing its job if it gave up the fight now. “Will working people be better off if we just walk away from our jobs and inflation remains 5 or 6 percent?” he said.
The Fed has raised its benchmark rate to more than 4.5% – the highest rate since 2007 – responding to prices rising at the fastest pace in decades. In February, the Federal Reserve upped rates by a quarter-point, the smallest increase since it began its rate hike from zero in March of last year. Interest rates now stand at 4.5-4.75%.
The FOMC will meet again March 21 through 22, at which point they’ll have more data to analyze. Figures for new job openings in February will be made public on Friday.
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