NPR’s Leila Fadel talks to Stephen Cecchetti, professor of international finance at Brandeis University, for a preview of Powell’s testimony which follows the Fed’s biggest rate hike since 1994.

LEILA FADEL, HOST:

Inflation is also the focus of lawmakers today. They’re questioning Federal Reserve chairman Jerome Powell. Last week, the Fed announced its biggest interest rate hike in almost 30 years to try and get inflation under control. But could it go too far and trigger a recession? Professor Stephen Cecchetti of Brandeis University joins me now to discuss.

Good morning.

STEPHEN CECCHETTI: Good morning.

FADEL: So today is the first of two congressional hearings this week for the Fed chair. As NPR’s Scott Horsley reports on this program, he’s going to have some explaining to do, including about how inflation got this high. So in your view, what should Powell’s key message be in his testimony?

CECCHETTI: Well, I think the key message for the chair should be that they are going to be able to control inflation. And I think what that’s going to mean is that he should really have to – he really has to set out a plan and make people believe that they can get this done.

FADEL: How much of the inflation, the rising prices, is actually in the control of the Fed?

CECCHETTI: Well, I think that short-term movements in inflation, things like short-term movements in gasoline prices or food, are not in their control. But a lot of the inflation that we’re seeing right now is quite broad-based. It’s moved far beyond food and gasoline. And it’s in things like rent and car purchases and airline tickets.

FADEL: Right. And now Powell’s walking into the testimony after one of the biggest interest rate hikes in history, as I mentioned. Is that enough to get things back on track to change this inflation?

CECCHETTI: Well, I think that probably the answer is not yet. It turns out that monetary policy is almost surely still accommodated. It’s still stimulating the economy. And so the question is whether or not they’re willing to go far enough.

FADEL: How far is far enough?

CECCHETTI: Well, they need to get to the point where at least interest rates are above inflation. And currently, I would say that the inflation trend – not the short-run movements in inflation, but the trend – the built-in parts are in the 4% to 5% range if they don’t do anything. So that means raising interest rates above 4% and probably above 5%.

FADEL: Now, Powell has said it’s not going to be easy to get inflation down. How does he maintain or restore confidence that the Fed can actually do something to help Americans who are hurting when it comes to renting, gas prices, and food prices?

CECCHETTI: Well, I think that he needs to set out a credible plan. He needs a communication strategy. And he needs a policy path that – makes people believe that they can actually do this. But it will take time.

FADEL: Right.

CECCHETTI: It’s not something that they can do overnight.

FADEL: Now, in your view, this interest rate hike might not have gone far enough. But when will we know whether this rate hike has been effective at all?

CECCHETTI: Well, I think when we start to see inflation coming down – and again, not coming down from the 8% levels that we’re seeing right now, which are largely transitory. I mean, it is – food and energy prices, especially, are not going to continue to rise at the rates that they have been over the last three or four or five months. But we need to see inflation come down below 4% to 5%, which is its trend level now. And to do that, the question is whether we’re going to actually need a recession.

FADEL: Now, Powell says a recession is not inevitable. Do you agree?

CECCHETTI: It’s not inevitable. But it’s going to – they’re going to have to be – or we will all have to be incredibly lucky for them to be successful in bringing inflation down without a recession. I think they’re certainly going to have to slow the economy. Whether or not we actually end up contracting or not, I don’t know. I mean, the labor market right now is extremely tight. So it could ease somewhat. I mean, vacancies are still running above people who are seeking jobs. So we have to do something in order to cool the economy down.

FADEL: Now, in a recession with inflation, who suffers the most in this country?

CECCHETTI: Well, I mean, I think that the people that suffer the most are clearly the people that are at the lower end of the income distribution and people who are on fixed incomes. Inflation is hurting them already because their consumption baskets are more heavily weighted towards food and energy, as well as rent, and their incomes are not rising.

FADEL: So is there something the Fed can do to protect those who will hurt the most, people with less money, who will be most impacted by these rising prices and a possible recession?

CECCHETTI: That’s not really something that’s in the Fed – that the Fed can do. They don’t have any tools for that. That’s something that – where we have to rely on fiscal policymakers, where – what we need is we need a safety net for those people, a safety net that’s based on things like food stamps or – and Medicaid and things like that.

FADEL: So some type of direct transfer, subsidies, some way to get them through this?

CECCHETTI: Well, yes, I would call them transfers and subsidies that come from the fiscal side. They come from the government, not from the central bank, not from the Federal Reserve.

FADEL: What happens if the Fed fails to get inflation down?

CECCHETTI: Well, that’s going to hurt everybody. I mean, the – price stability, inflation in the range of about 2%, is the basis for sustained growth. And so I think that we really need to get inflation down. It will benefit everyone. It makes everything much more predictable for us. It makes planning easier. And it just makes our lives simpler.

FADEL: Professor Stephen Cecchetti of Brandeis University. Thank you so much.

CECCHETTI: Thank you.