Fed chair admits series of rate hikes could tip US into recession

WASHINGTON: The US economy remains strong, but a series of aggressive rate hikes aimed at calming soaring inflation could eventually trigger a recession, Federal Reserve (Fed) Chairman Jerome Powell warned yesterday.

Powell, whose testimony before senators was closely watched by investors and analysts, also said the world’s largest economy faces an ‘uncertain’ global environment and could see further inflation ‘surprises’. .

The Fed chairman again stressed that policymakers understand the difficulties caused by rising prices and are committed to bringing down inflation, which is at a 40-year high.

Last week, the US central bank announced the biggest interest rate hike in nearly 30 years and promised other similar measures to tackle soaring prices, gasoline and food prices skyrocketing and millions of Americans struggling to cope.

But when peppered with questions about the prospect of a recession, Powell acknowledged the risk.

“That’s by no means our intended outcome, but it’s certainly a possibility,” he told the Senate Banking Committee.

“And frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a still strong job market.”

In his opening remarks, Powell insisted that the US economy “is very strong and well positioned to handle tighter monetary policy.”

“Inflation has obviously surprised on the upside over the past year, and more surprises may be in store,” the Fed chief said during his semiannual appearance before Congress.

Policymakers “will need to be nimble” given that the economy “often moves in unexpected ways”, he said.

The Fed is facing intense criticism that it has been too slow to react to developments in the economy, which has benefited from a flurry of stimulus from the federal government.

Last week’s 0.75 percentage point increase in the benchmark policy rate was the third since March, pushing the policy rate up a total of 1.5 points. Powell then said a similar increase was likely in July.

The ideal scenario would be for these measures to cool the economy enough to ease inflationary pressures, without stifling growth – the hoped-for “soft landing”.

“I think it’s going to be very difficult,” Powell said, insisting there are “pathways” to avoid recession, and that he doesn’t see the risk of a downturn as “particularly high”.

Financial markets appeared encouraged by his relatively optimistic comments, which echo those of other Fed officials in recent days who pushed back against growing pessimism.

But Wall Street stocks lost steam late in the trading session and the Dow Jones ended the day down 0.2%.

Along with easing financial pressure on less wealthy American families, the Fed chief said reducing inflation was “essential” to maintaining a healthy labor market.

The U.S. economy recovered quickly from the Covid-19 pandemic, helped by robust consumer spending, and continued to add jobs at a brisk pace, pushing unemployment to its lowest level in 50 years.

But buoyant demand for homes, cars and other goods has come up against transportation and supply chain grunts in parts of the world where Covid-19 has remained a challenge.

This fueled inflation, which worsened significantly after Russia invaded Ukraine in late February and Western countries imposed harsh sanctions on Moscow, driving up food and fuel prices at a rapid pace. frantic.

But Powell noted that inflation is a global problem, not unique to the United States.

Many major central banks have joined the Fed in beginning to tighten monetary policy – ​​with the notable exception of the Bank of Japan.

Powell said many factors driving inflation are beyond the Fed’s control, but he pointed to signs that rising rates are having an impact, as business investment slows and “the activity in the housing sector appears to be slowing, in part due to rising mortgage rates.”

“The tightening of financial conditions we’ve seen in recent months should continue to temper growth and help better balance demand with supply,” Powell said. – AFP

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