Jay Powell said a U.S. recession is “certainly a possibility” and warned avoiding a downturn now largely depends on factors beyond the Federal Reserve’s control.
During testimony before the Senate Banking Committee on Wednesday, the Fed chairman acknowledged that it is now more difficult for the central bank to stamp out soaring inflation while maintaining a strong labor market.
He argued that the United States was resilient enough to withstand tighter monetary policy without sliding into a slowdown, but acknowledged that external factors, such as the war in Ukraine and China’s Covid-19 policy, could further complicate the outlook.
“That’s not our expected outcome at all, but it’s certainly a possibility,” Powell said, responding to a question about the risk that the Fed’s plans to raise rates this year could lead to a recession.
He added that due to “events of the past few months around the world”, it was “now more difficult” for the central bank to meet its targets for 2% inflation and a strong labor market.
“Whether we are able to accomplish this will depend to some extent on factors beyond our control,” he said, referring to the spike in commodity prices resulting from the invasion of Ukraine by Russia and obstructed supply chains. due to lockdowns in China.
Powell has been repeatedly pressed by lawmakers about the burden imposed by the Fed’s recent moves to curb inflation, now at 8.6%, the highest in four decades. The central bank last week implemented the largest interest rate hike since 1994, signaling support for what is expected to be the most aggressive monetary policy tightening campaign since the 1980s.
“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions out of work,” said Elizabeth Warren, the progressive Democratic senator from Massachusetts. “I hope you reconsider before you knock this economy off a cliff.”
Powell said in a separate exchange that there would be considerable risks if the Fed did not act to restore price stability as inflation became entrenched.
“We know from history that this will hurt the people we would like to help, low-income people who are currently suffering from high inflation,” he said. “It will hurt them more than anyone. We cannot fail in this task.
By noon, the two-year US Treasury yield, which moves with interest rate expectations, fell 0.1 percentage point to 3.06%. US stock indices rose with the S&P 500 up 0.2%.
Concerns about a possible recession have increased, with inflation data worse than expected this month. While Powell argued that the US economy is “very strong and well positioned to handle tighter monetary policy,” he acknowledged that further inflationary surprises “could be in store.”
“We will therefore need to be nimble in responding to incoming data and changing perspectives, and we will strive to avoid adding uncertainty in what is already an extraordinarily difficult and uncertain period,” he said. he declares.
Traders have priced the benchmark federal funds rate at around 3.6% by the end of the year, a rise that has prompted a broader rise in borrowing costs globally. Powell said Wednesday that tighter financial conditions are already having the expected impact and dampening demand.
Powell’s testimony comes at a critical time for the White House, which is dealing with mounting expectations of a marked slowdown in growth ahead of November’s midterm elections. Many economists have since predicted a recession by next year.
“There is nothing inevitable about a recession,” US President Joe Biden told reporters this week – a message also sent by Janet Yellen, the US Treasury Secretary, and Brian Deese, the director of the Economic Council national.
Fed officials have begun preparing market participants for at least another 0.75 percentage point rate hike at their next meeting in July. Powell said on Wednesday that the Fed needed “hard evidence” that inflation is moderating before relaxing its resolve to raise interest rates.
Powell said future decisions on Fed actions will be decided “meeting by meeting.”