Jerome H. Powell, the chair of the Federal Reserve, said that officials are looking for “compelling evidence” that rapid inflation is easing as they try to restore price stability in the United States, reiterating the central bank’s commitment to wrestling cost increases under control at an uncertain moment.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” Mr. Powell said in testimony prepared for delivery to the Senate Banking Committee. Mr. Powell is testifying before senators on Wednesday, and will speak to the House Financial Services Committee on Thursday.
Mr. Powell’s trip to Capitol Hill comes at a challenging moment for the central bank. Inflation as measured by the Consumer Price Index is running at 8.6 percent, the fastest pace in more than four decades, having re-accelerated in May thanks to surging gas prices and airfares. Although the economy remains strong and unemployment is historically low at 3.6 percent, the fast price increases have prompted the Fed to adjust its policy at an increasingly rapid pace to try to cool demand.
The Fed raised its policy interest rate by three-quarters of a percentage point last week, the largest move since 1994, having lifted them by a quarter-point in March and half-point in May. The escalation comes as central bankers become increasingly concerned about how broad inflation is, touching the prices of goods and services that span the economy, and as they worry that consumer expectations for future price increases have begun to creep up. If people expect faster inflation, they may ask for higher wages to cover costs and prompt employers to charge more thanks to climbing labor costs, setting off an inflationary cycle.
“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” Mr. Powell said on Wednesday. “It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”
Understand Inflation and How It Impacts You
The Fed’s policies to restrain demand and wrestle inflation lower are expected to hurt the economy. Central bankers themselves predict that unemployment will rise and growth will slow as higher rates take effect, making mortgages, credit card debt and business loans more expensive.
Wall Street investors are concerned that the central bank will set off a recession in its bid to bring inflation lower, and economists have warned that unemployment may need to climb markedly to bring demand down enough that inflation comes back under control. Households are fearful about the future, and consumer confidence is plummeting.
That spells trouble for many of the politicians Mr. Powell is testifying before this week — particularly the Democrats in power. Voter approval of President Biden has sunk under the weight of inflation, which the administration regularly calls its top priority.
In fact, Mr. Biden plans to call on Congress on Wednesday to temporarily suspend the federal gas tax, an effort to slow soaring fuel prices. Passing such a measure could prove challenging, and economists have generally dismissed that policy as having a limited impact, as do most of the measures to fight inflation that the administration has been able to roll out.
The Fed, which is independent of politics, is the country’s main answer to skyrocketing prices. Its policies may be painful, but it is isolated from election cycles so that central bankers can make tough short-term decisions to put the economy on a more stable long-term track.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
But the central bank’s policies are not perfectly suited to this moment. Its rates work to slow demand, but many of the factors pushing inflation higher today are linked to supply: Shutdowns in China meant to contain the coronavirus have slowed factory production, the war in Ukraine is pushing gas and food costs higher, and lingering shipping issues that started amid the pandemic have kept some parts and goods out of stock.
Still, officials have pledged to act quickly to get inflation under control at a moment when many factors are at play.
“Aggregate demand is strong, supply constraints have been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services,” Mr. Powell said Wednesday.