WASHINGTON (BLOOMBERG) — Federal Reserve Chairman Jerome Powell has most explicitly acknowledged yet that sharp interest rate hikes could tip the U.S. economy into recession, saying a recession is possible and calling a soft landing “very difficult”.
“The other risk, however, is that we fail to restore price stability and allow this high inflation to take root in the economy,” Powell told lawmakers on Wednesday (June 22). “We cannot fail in this task. We must return to 2% inflation.”
The Fed Chairman was testifying before the Senate Banking Committee on the first of two days of congressional hearings.
In his opening remarks, Powell said officials “expect ongoing rate increases to be appropriate” to ease the strongest price pressures in 40 years.
“Inflation has obviously surprised on the upside over the past year, and more surprises may be in store. So we will need to be nimble in responding to incoming data and changing outlooks,” Ms. Powell, who is appearing before House Financial Services. Committee Thursday.
The Federal Open Market Committee (FOMC) last week raised its benchmark lending rate by 75 basis points – the biggest increase since 1994 – to a range of 1.5% to 1.75%. Mr 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 hikes during Wednesday’s hearing.
The Fed chairman faced a barrage of questions about recession risk, with economists increasingly signaling the likelihood of a downturn over the next two years.
Former New York Fed Chairman Bill Dudley wrote in a Bloomberg Opinion column on Wednesday that a recession is “inevitable” within 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 the Fed “isn’t trying to provoke and doesn’t think we’ll need to provoke a recession.”
The Fed chief also said he didn’t view the likelihood of a recession as particularly high right now, but conceded it was “definitely a possibility”, noting that recent events have made it more difficult for the Fed to reduce inflation while maintaining a strong labor market.
A soft landing” is our goal. This is going to be very difficult. It has been made much more difficult by the events of the past few months – thinking about the war and commodity prices and other issues with the chains supply”.
“The concern about recession risk is a bit more palpable,” said Derek Tang, an economist at LH Meyer, a Washington-based policy analysis firm.
Mr Tang said the message that the Fed is not trying to cause a recession – even if that could result as it continues to raise rates – “is a very difficult tightrope to walk.”
Investors expect the U.S. central bank to continue raising rates to a high of around 3.6% by the middle of next year, according to interest rate futures. interest.
“Financial conditions have tightened and priced in a series of rate hikes and that’s appropriate,” Powell said. “We have to go ahead and have them.”
The Labor Department’s consumer price index rose 8.6% 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% over the next five to 10 years, the highest since 2008 and up from 3% in May.
The rising cost of living has angered Americans and damaged the reputation of US President Joe Biden’s Democrats with voters ahead of November’s midterm congressional elections.
Mr Powell has heard heavy criticism of his inflation performance, particularly from Republicans, with Alabama Senator Richard Shelby telling him that “the Federal Reserve has failed the American people”.