Fed Chairman: Continued rate hikes are appropriate, and the Fed is firmly committed to restoring inflation to 2%

Federal Reserve Chairman Powell testified before the Senate Banking Committee on the semi-annual monetary policy report. Powell said that continued interest rate hikes are appropriate. The pace of rate hikes depends on future data. The Fed is firmly committed to returning the inflation rate to 2%. The inflation level is significantly higher than expected, and there may be more surprises in the future. The Fed understands the difficulties caused by high inflation and is firmly committed to bringing inflation down and is taking prompt action. In his speech, Powell talked about the current economic situation and outlook, as well as the monetary policy implemented by the Federal Reserve.

Current Economic Situation and Outlook <br />Inflation remains well above our 2 percent longer-term objective. In the 12 months through April, total PCE (personal consumption expenditures) prices rose 6.3 percent; excluding the more volatile food and energy categories, core PCE prices rose 4.9 percent. Available data for May suggest that the core measure may have maintained that pace or slowed slightly last month. Aggregate demand has been strong, and supply constraints have been larger and more persistent than expected, and price pressures have spread to a wide range of goods and services. Russia's invasion of Ukraine caused a surge in crude oil and other commodity prices, pushing up gasoline and fuel prices and putting additional upward pressure on inflation. China's COVID-19-related lockdown is likely to exacerbate ongoing supply chain disruptions.

Overall economic activity declined slightly in the first quarter as unusually sharp swings in inventories and net exports offset continued strong underlying demand. Recent indicators suggest that real GDP growth accelerated in the quarter and that consumer spending remained strong. In contrast, growth in business fixed investment appears to be moderating and activity in the housing sector appears to be slowing, partly reflecting higher mortgage rates. The tighter financial conditions seen in recent months should continue to dampen growth and help bring demand into better balance with supply.

The labor market remains extremely tight, with the unemployment rate near a 50-year low, job openings at historic highs, and wage growth accelerating. Job gains have averaged 408,000 per month over the past three months, slower than the average pace earlier this year but still strong. Labor market conditions have improved broadly, including among workers at the lower end of the wage distribution and among African Americans and Hispanics. A box in the June Monetary Policy Report discusses employment and income developments for all major demographic groups. Labor demand has been very strong, while labor supply remains weak, with the labor force participation rate little changed since January.

Monetary Policy <br />The Federal Reserve's monetary policy will be based on the mission of promoting maximum employment and stable prices for the American people. The Federal Reserve is mindful of the great difficulties that high inflation poses, particularly to those least able to pay for necessities such as food, housing, and transportation. The Federal Reserve will pay close attention to the risks that high inflation poses to us, and the Federal Reserve is firmly committed to returning inflation to its 2 percent objective.

The Federal Reserve has been adjusting its policy amid a rapidly changing economic environment and will continue to do so. With inflation well above its 2 percent longer-run goal and an extremely tight labor market, the Fed has raised its target range for the federal funds rate at each of its past three meetings, resulting in 1-1/2 percentage points increases in the federal funds rate. Over the coming months, the Fed will look for convincing evidence that inflation is declining. The Fed expects that continued rate increases will be appropriate; the pace of these changes will continue to depend on incoming data and the evolving economic outlook. The Fed's primary focus is to reduce inflation to its 2 percent goal and keep longer-term inflation expectations well anchored.