WASHINGTON, DC, United States (AP) — When Federal Reserve Chair Jerome Powell last appeared before Congress, in June 2022, inflation had reached a four-decade high of nearly 9 per cent and showed no signs of easing.

This week Powell returns to Capitol Hill for two days of hearings under far different circumstances. The Fed has sharply raised interest rates in the past year to combat accelerating prices, and year-over-year inflation has dropped for seven straight months.

Yet, if anything, Powell’s task has grown even more complicated.

Just a month ago the economy appeared to be cooling and inflation steadily declining. But a spate of government data has since painted a very different picture. Consumer spending has remained strong, hiring is still robust, and the economy keeps steadily expanding. And recent government reports show that inflation pressures are easing more gradually and fitfully than previous data had shown.

At a news conference last month Powell said that the long-awaited “disinflation” process — a broad and steady slowdown in inflation — had finally begun. Yet he stressed that it was only in its early stages and would take longer than many economists assumed. Other Fed officials have since echoed that message.

“The disinflation momentum we need is far from certain,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said in a speech Saturday. “It’s clear there is more work to do.”

Daly added that higher rates “maintained for a longer time will likely be necessary”.

Indeed, except for the housing industry which has been pummeled by higher borrowing costs, most of the economy has seemed generally resistant to the rate hikes the Fed has engineered. The central bank has raised rates at the fastest pace since the 1980s. Yet most economists think that to bring inflation back to their 2 per cent target the Fed’s policymakers will need to raise rates further — and keep them at a peak longer — than they had projected in December.

“The economy is running hotter than most policymakers anticipated a few months ago,” Michael Pearce, lead US economist at Oxford Economics, wrote in a research note.

Pearce expects the Fed to raise its key rate by a quarter-point at each of its next three meetings, and he foresees the possibility of additional hikes beyond those. The Fed’s hikes typically make mortgages, auto loans, credit card rates and business lending more expensive. It’s a trend that can slow spending and inflation and also threaten to send the economy sliding into a recession.

That high-risk quandary will put Powell in a delicate spot during the congressional hearings Tuesday and Wednesday. He will have to placate Democrats worried that the Fed’s aggressive hikes will cause a painful recession, while reassuring Republicans that the Fed will send rates high enough to quash inflation.

Signs of the economy’s continued resilience have reduced fears of recession. But they have also heightened concerns that inflation will be harder to conquer.

Fed officials warned last week that their benchmark rate might have to go higher this year than their previous forecast of roughly 5.1 per cent. Christopher Waller, a member of the Fed’s seven-member board of governors, said he believed that if the economy remained as hot as it appeared in January — when a half-million jobs were added — the Fed’s key rate would have to top 5.4 per cent. That would be nearly a point higher than its current level of about 4.6 per cent. The risk of a weakened economy, with waves of layoffs and business failures, would become likelier.

Though Fed officials say they don’t want unemployment to rise significantly, they have warned that hiring will have to slow and some job losses will be necessary to tame inflation, though they couch such views in central bank jargon.

“Bringing inflation back to 2 per cent will likely require a period of below-trend growth and some softening of labour market conditions,” the Fed’s semi-annual monetary policy report to Congress, released Friday, said.

Ever-higher interest rates could spark outspoken opposition from some Democrats who argue that the current persistent inflation is mostly a result of global factors — like continued supply shortages and Russia’s war against Ukraine — that the Fed can do little about, and of price-gouging by corporate giants as reflected in bloated profit margins.

For their part, congressional Republicans will likely highlight concerns that the Fed must do even more to cool inflation. Jason Furman, a former top economist for President Barack Obama, expressed such concerns in the Wall Street Journal last week. Furman wrote that the Fed should raise its key rate by a substantial half-point when it meets this month, and signal that its benchmark rate will likely reach 6 per cent this year.

Many economists say they think inflation will keep falling to roughly 3.5 per cent or 4 per cent but could plateau at that level. Getting it down to the Fed’s 2 per cent target level could require more pain in the form of widespread job losses.

Some congressional Democrats may urge the Fed to raise its inflation target to 3 per cent and argue that it isn’t worth risking a deep recession just to lower inflation by 1 more percentage point. Yet so far Powell has made it clear that he opposes any such change, out of concern it would undermine the Fed’s inflation-fighting credibility. Other officials have echoed his views.

Philip Jefferson, a Fed board member, suggested last week that raising the inflation target would “introduce an additional risk” because it might lead people to fear that the target “could be changed opportunistically in the future”.

Other issues will likely arise when Powell testifies Tuesday to the Senate Banking Committee, and Wednesday to the House Financial Services Committee. One could be who will replace Lael Brainard, who has left her position as the Fed’s vice-chair for a top policymaking post at the White House.

Senator Robert Menendez, a member of the Banking Committee, has urged the Biden Administration to fill the spot with a Hispanic. Menendez notes that there has never been a Hispanic member of the Fed’s rate-setting committee.

Democrats will also likely press Powell on the likely consequences if Congress fails to raise the Government’s borrowing limit. The limit was reached in January, and the Biden Administration is using financial manoeuvres to avoid defaulting on Treasury securities. Congressional Republicans are demanding steep spending cuts in return for raising the debt ceiling.

“There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States Government can pay all of its obligations when due,” Powell said at his news conference last month. “No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner.”