June 22, 2022

At Hearing, Senator Warren Calls out Chair Powell for Fed’s Interest Rate Increases that Won’t Address Key Drivers of Inflation and Risk Driving Economy into Recession

At Hearing, Senator Warren Calls out Chair Powell for Fed’s Interest Rate Increases that Won’t Address Key Drivers of Inflation and Risk Driving Economy into Recession

Warren: “Rate hikes won’t make Vladimir Putin turn his tanks around and leave Ukraine. Rate hikes won’t break up monopolies. Rate hikes won’t straighten out the supply chain… Rate increases make it more likely that companies will fire people and slash hours to shrink wage costs. Rate increases also make it more expensive for families to borrow money for a house,”

Warren: “The Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer.”

Video of Hearing (YouTube)

Washington, D.C. – At a hearing of the Senate Banking, Housing, and Urban Affairs Committee, U.S. Senator Elizabeth Warren (D-Mass.) blasted Federal Reserve Chair Jerome Powell for the Fed’s announced interest rate increases, which are unable to address the primary current drivers of inflation and risk pushing the economy into a recession. 

In response to Senator Warren’s questions, Chair Powell confirmed that the Fed’s interest rate increases will not bring down gas and food prices, two of the biggest drivers of inflation today.

Instead, Senator Warren called out the dangers of interest rate increases – which aim to slow inflation by making it more expensive for businesses to invest, which throws workers out of work and leaves families will less money to spend in the economy. Senator Warren urged Chair Powell to reconsider aggressive interest rate hikes before the economy dives into a recession. 

Transcript: Hearing on the Semiannual Monetary Policy Report to Congress 
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Wednesday, June 22, 2022

Senator Elizabeth Warren: Thank you, Acting Chairman. I appreciate the help of the Chairman this morning, and thank you for being with us, Chair Powell.

So Americans are struggling with rising costs, and all eyes turn to the Fed. Last week you announced that the Fed would raise rates by three-quarters of a percentage point, the biggest increase in nearly 30 years.

So, let’s talk about what the Fed is and isn’t doing when it raises interest rates to try to bring down inflation.

Let’s start with gas prices. The price of gas is up 40% since Russia invaded Ukraine in February. Chair Powell, will gas prices go down as a result of your interest rate increase?

Jerome Powell, Chair of the Federal Reserve: I would not think, so no. 

Senator Warren: Ok, and that matters because gas prices are one of the single biggest drivers of inflation. Energy prices overall drove a third of the inflation last month. But the Fed’s tools, as you say, have no impact here. So let’s look at another necessity; food. The price of groceries is up nearly 12% this year. And Americans feel the pinch – no matter how much groceries cost, people still gotta eat. Chair Powell, will the Fed’s interest rate increases bring food prices down for families?

Chair Powell: I wouldn’t say so, no.

Senator Warren: Ok, so a Fed interest increase won’t bring down these prices. And why? Because rate hikes won’t make Vladimir Putin turn his tanks around and leave Ukraine. Rate hikes won’t break up monopolies. Rate hikes won’t straighten out the supply chain, or speed up ships, or stop a virus that is still causing lockdowns in some parts of the world.  

So let’s talk about what interest rate increases can do. 

Chair Powell, you said last week that interest rate increases, quote, moderate demand. Can you just explain a little bit more about what that means?

Chair Powell: Sure, so we think about interest rate increase as affecting financial conditions and then the economy through three broad channels. The first of which is intra-sensitive spending, so that’s durable goods and automobiles and things like that. So, interest rates go up, people’s demand for, as a result of higher interest rates, will moderate or decline, so that supply and demand can get into better balance. 

The second channel is just asset prices generally. Interest rates, as they go up, will cause asset prices to moderate across the economy, and people spend a little bit less out of their lower level of wealth.

The third channel is the exchange rate which is really just another asset price and that just basically, as the dollar strengthens, sorry, as rates go up, the dollar would strengthen which would tend to drive it up. 

Senator Warren: So I appreciate this, and I do, I appreciate the explanation, but let me see if I can put a little more plain vanilla explanation of what’s going on here. If I understand what you said, and what economists are saying across the board, is that when you raise interest rates there’s going to be less money to invest, and it’s going to dampen business investment. Is that a fair statement? 

Chair Powell: I think the idea is to–

Senator Warren: –makes it more expensive to invest.

Chair Powell: –moderate demand so it can be in better balance with supply. The current situation is demand is in way excess of supply.

Senator Warren: More expensive to invest, which in turn is going to throw workers out of work, and when they’re out of work, they have less money to spend. So, I get that rate increases stop companies from spending money to build new plants, or buy new trucks, or to hire new people, right Chair Powell? When money’s more expensive they’re less inclined to do that? I think that’s what you just said on asset pricing? Right?

Chair Powell: Well, in the labor market you have, as you know, you have a situation where there is a shortage of workers and there are two job vacancies for every person who is actively looking for work. So part of this is to get the labor market back into balance. 

Senator Warren: I appreciate you call it back into balance, what I’m trying to get at though, is what does the tool of raising rates do? And part of what you just said is that it increases, in effect, the cost to invest. To buy those trucks or new plants or to hire new people. 

The reason I raise this and the reason I’m so concerned about this is rate increases make it more likely that companies will fire people and slash hours to shrink wage costs. Rate increases also make it more expensive for families to do things like borrow money for a house — and so far this year, the cost of a mortgage has already doubled.

Inflation is like an illness. And the medicine needs to be tailored to the specific problem. Otherwise, you could make things a lot worse. 

And right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer. And while President Biden is working to increase energy supplies and straighten out supply chain kinks and break up the monopolies and bring down prices, you could actually tip this economy into a recession. 

So, I just want to say, you know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work. And I hope you’ll reconsider that before you drive this economy off a cliff.

Thank you, Mr. Chairman.

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