US Federal Reserve Chair Jerome Powell on Wednesday gave his most explicit acknowledgment to date that steep interest-rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”
“The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers. “We can’t fail on that task. We have to get back to 2 percent inflation.”
The Fed chair was testifying before the US Senate Committee on Banking, Housing and Urban Affairs during the first of two days of congressional hearings.
In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate” to cool the hottest price pressures in 40 years.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” said Powell, who was to appear before the US House of Representatives Committee on Financial Services yesterday.
The US Federal Open Market Committee last week raised its benchmark lending rate 75 basis points — the biggest increase since 1994 — to a range of 1.5 to 1.75 percent.
Powell told reporters after the meeting that another 75 basis point increase, or a 50 basis point move, was on the table next month, but he made no direct reference to the size of future hikes during Wednesday’s hearing.
The Fed chair faced a barrage of questions about the risk of recession, with economists increasingly flagging the likelihood of a downturn sometime in the next two years.
Former New York Fed president Bill Dudley wrote in a Bloomberg Opinion column on Wednesday that a recession was “inevitable” within the next 12 to 18 months.
“The American economy is very strong and well-positioned to handle tighter monetary policy,” Powell said in his opening remarks.
He later said the Fed is “not trying to provoke and do not think we will need to provoke a recession.”
The Fed chief also said that he did not see the likelihood of a recession as particularly elevated right now, but conceded that it was “certainly a possibility,” adding that recent events have made it harder for the Fed to lower inflation while sustaining a strong labor market.
A soft landing “is our goal. It is going to be very challenging. It has been made significantly more challenging by the events of the past few months — thinking there of the war and of commodities prices, and further problems with supply chains,” he said.
“Financial conditions have tightened and priced in a string of rate increases and that’s appropriate,” Powell said. “We need to go ahead and have them.”
The US Department of Labor’s consumer price index rose 8.6 percent last month from a year earlier, a four-decade high. University of Michigan data showed US households expect inflation of 3.3 percent over the next five to 10 years, the most since 2008 and up from 3 percent last month.
The rising cost of living has angered Americans and hurt the standing of US President Joe Biden’s Democrats with voters ahead of November congressional midterm elections.
Powell heard sharp criticism of his performance on inflation, especially from Republicans, with US Senator Richard Shelby telling him that “the Federal Reserve failed the American people.”
Fed officials have admitted that they were too slow to tighten and are now trying to front-load rate increases in the most aggressive policy pivot in decades.
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