Federal Reserve Chairman Jerome Powell acknowledged Wednesday that the central bank’s battle against high inflation could tip a sofa-far resilient US economy into a recession.
Testifying before the Senate Banking Committee, the Fed chief ceded that the bank’s ongoing series of interest rate hikes could slow the economy enough to halt job gains and economic growth — the two signs of an economy in retreat.
Inducing a recession is “not our intended outcome but certainly a possibility,” Powell said when asked by Sen. Jon Tester (D-Mont.) if the Fed could trigger a downturn.
“And, frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want,” he added.
Powell’s appearance before the committee comes amid growing concern over the outlook for the US economy and the rising chances of a recession hitting the nation sometime within the next two years. The Fed last week issued a 0.75 percentage point interest rate hike — the largest since 1994 — after Labor Department data showed inflation continuing to surge in May.
The Federal Open Market Committee (FOMC), the panel of Fed officials in control of interest rates, was expected to hike rates by 0.5 percentage points at the conclusion of its previously scheduled meeting last month.
But the FOMC moved faster than Powell and many of his colleagues signaled before the May surge of inflation triggered alarm at the Fed and in financial markets. A sharp rebound in oil prices and shocks to food, fertilizer and other key commodity supplies have also pushed prices higher across the world.
When the Fed hikes interest rates, economic activity tends to slow as consumers and businesses feel the weight of higher borrowing costs. As spending declines, firms are often forced to keep prices stable or cut them, which throws cold water on inflation.
Powell said Wednesday the Fed will likely need to raise rates above a “neutral” level — one that neither stimulates nor constrains the economy — and to a “moderately restrictive” point. Fed officials expect to raise their baseline interest rate to a midpoint of roughly 3 percent by the end of the year, according to projections released last week.
The Fed’s goal is to slow the economy enough to reduce inflation without forcing Americans out of their jobs or stalling the growth altogether. But inflation has continued to surge despite several rapid rate hikes, and economists fear it may not come down until the Fed raises rates to a high enough level to slow the economy into recession.
“The other risk, though, is that we would not manage to restore price stability, and then we would allow this high inflation to get entrenched in our economy,” Powell said.
“We know from history that it will hurt the people we’d like to help, the people on the lower end of the income spectrum who suffer now from high inflation. That will hurt them more than anyone so that we can’t fail on that task,” he said.
Both Democrats and Republicans agreed with Powell’s desire to bring inflation down as quickly as possible but took vastly different views on how the Fed — and Congress — should tackle rising prices.
Democrats warned Powell against boosting interest rates to bring down inflation caused by forces the Fed chairman acknowledged were beyond the bank’s control. When pressed by Sen. Elizabeth Warren (D-Mass.), Powell said higher Fed interest rates could not boost the production of oil, lift Russian blockades on Ukrainian wheat exports or end other supply shocks driving prices higher.
“Inflation is like an illness, and the medicine needs to be tailored to the specific problem. Otherwise, you can make things a lot worse, and right now, the Fed has no control over the main drivers of rising prices,” said Warren, who opposed Powell’s recent reconfirmation.
“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work. And I hope you reconsider that before you drive this economy off a cliff,” she said.
Republicans, meanwhile, criticized Powell and the Fed for not heeding their calls to raise rates as inflation began to rise last year. The Fed held off, expecting inflation to fall as supply chain disruptions and labor shortages driven by the pandemic eased, but was foiled by the delta and omicron variants.
Several GOP senators questioned whether the Fed had the will to induce a recession if necessary. A downturn could be ruinous for millions of Americans but would give Republicans a clear path to winning back control of Congress in 2022 and possibly the White House in 2024.
“As inflation continues to run rampant. I believe the Federal Reserve and this administration failed the American people,” said Sen. Richard Shelby (R-Ala.)
“The Federal Reserve still has a long way to go,” he said.