The chairman of the Federal Reserve (Fed), Jerome Powellmade his most explicit acknowledgment to date that sharp interest rate hikes could tip the US economy into recession, saying it’s possible and calling a soft landing “very challenging.”
“However, the other risk is that we will fail to restore price stability and we will allow this high inflation to take root in the economy,” Powell told lawmakers on Wednesday. “We cannot fail in that task. We have to go back to two percent inflation.”
The Fed chairman testified before the Senate Banking Committee during the first of two days of hearings in Congress. In his opening remarks, Powell said officials “anticipate ongoing rate increases will be appropriate” to cool price pressures that are the highest in 40 years.
“Obviously, inflation has surprised to the upside over the past year, and more surprises could be expected. So we’re going to have to be nimble in responding to incoming data and evolving outlooks,” said Powell, who is appearing before the House Financial Services Committee on Thursday.
The ‘slap’ of the Fed
Last week, the Federal Open Market Committee raised its benchmark interest rate by 75 basis points, the biggest increase since 1994, to a range of 15 percent to 1.75 percent. Powell told reporters after the meeting that another 75 basis point hike, or a 50 basis point move, was on the table next month. But he made no direct reference to the size of future increases during Wednesday’s hearing.
The Fed chairman faced a barrage of questions about recession risk, and economists increasingly pointed to the likelihood of a recession sometime in the next two years. Former New York Fed President Bill Dudley wrote in an opinion column for Bloomberg on Wednesday that a recession is “inevitable” in the next 12 to 18 months.
“The US economy is very strong and well positioned to handle tighter monetary policy,” Powell said in his opening remarks. He later said that the Fed “is not trying to provoke and I don’t think we have to provoke a recession”.
The Fed chairman also said that didn’t see the likelihood of a recession as particularly high at the momentbut admitted that was “certainly a possibility,” noting that recent events have made it difficult for the Fed to bring down inflation while maintaining a strong labor market.
A soft landing “is our goal. It’s going to be very challenging. It’s been made significantly more challenging by the events of the last few months, thinking about the war and commodity prices and other issues with supply chains.”
What economists say
“The concern about the risk of a recession is a little more palpable,” said Derek Tang, an economist at LH Meyer, a Washington-based policy analysis firm. Tang said the message that the Fed is not trying to cause a recession, although it could result in one if it continues to raise rates, “is a very difficult tightrope to walk.”
Investors expect the US central bank to keep raising rates to a high of around 3.6 percent in the middle of next year, according to interest rate futures.
“Financial conditions have tightened and priced in a series of rate hikes and that is appropriate,” Powell said. “We have to go ahead and have them.”
The Labor Department’s consumer price index rose 8.6 percent last month from a year earlier, a four-decade high. Data from the University of Michigan showed that US households expect inflation of 3.3 percent over the next five to 10 years, the highest since 2008 and up from 3 percent in May.
The rising cost of living has angered Americans and hurt the standing of President Joe Biden’s Democrats with voters ahead of midterm congressional elections in November.
Powell has heard harsh criticism of his performance on inflation, especially from Republicans, with Alabama Senator Richard Shelby telling him that “the Fed failed the American people.”
With the collaboration of Steve Matthews, Maria Paula Mijares Torres and Vince Golle.