Federal Reserve Board Chair Jerome Powell testifies about ‘monetary policy and the state of the economy’ before the House Financial Services Committee on March 02, 2022 in Washington, DC.
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Interest rate hikes are the Fed’s best tool for slowing inflation.
But Fed Chair Powell said Wednesday that rate hikes won’t provide quick relief for soaring food and gas prices.
Whether the Fed can quickly cool inflation will depend on some factors “we don’t control,” he added.
The Federal Reserve is in full inflation-fighting mode, but it has a problem. Slowing the price surge in the goods slamming Americans’ wallets the most requires a scalpel, and the Fed’s best tool acts much more like a hammer.
The Fed’s move to higher interest rates aims to cool inflation by broadly weakening demand. They translate to pricier mortgages, car loans, and credit-card debt, and such increases tend to slow Americans’ spending.
Yet the prices hurting Americans the most are flying under the radar. Food and energy prices surged again through May as the war in Ukraine continued to hamper supply. Gasoline prices leaped 4.1% through the month while food costs soared 1.2%, according to the Consumer Price Index.
Fed Chair Jerome Powell appeared in front of the Senate Banking Committee on Wednesday for a semiannual hearing on monetary policy, and lawmakers were quick to lay out the mismatch plaguing the central bank. The Fed started raising interest rates in March and has since accelerated its hiking plans. Officials approved a 0.75 percentage point rate increase on Wednesday, marking the largest hike since 1994.
When Sen. Elizabeth Warren of Massachusetts asked whether rate increases will quickly ease gas prices, Powell was clear.
“I would not think so, no,” the chairman said, adding that higher rates wouldn’t immediately cool food inflation either.
The discrepancy strikes at the biggest economic risk facing the US. With rate …read more
Source:: Business Insider