Jay Powell said a US recession is “definitely a possibility” and warned that surviving a recession now depends largely on factors beyond the control of the Federal Reserve.
In testimony to the Senate Banking Committee on Wednesday, the Fed chairman acknowledged that it was now more challenging for the central bank to root out rising inflation while maintaining a strong job market.
He argued that the US was resilient enough to withstand tough monetary policy without slipping into recession, but acknowledged that external factors, such as the Ukraine war and China’s COVID-19 policy, could further complicate the outlook.
“It’s not exactly our intended outcome, but it’s certainly a possibility,” Powell said, answering a question about the risk of the Fed’s plans to raise rates this year could lead to a recession. .
He added that it was “now more difficult” for the central bank to achieve its targets of 2 percent inflation and a stronger labor market, due to “events in the past few months around the world”.
“The question of whether we are able to accomplish this will depend in part on factors that we do not control,” he said in reference to Russia’s invasion of Ukraine and rising commodity prices stemming from closed supply chains. . Due to China’s lockdown.
Powell has been pressed at times by lawmakers about the burden imposed by the Fed’s recent moves to tackle inflation, which now stands at 8.6 percent, the highest in four decades. The central bank last week raised its biggest interest rate hike since 1994, signaling its support for what’s been the most powerful campaign to tighten monetary policy since the 1980s.
“You know what’s worse than high inflation and low unemployment? It’s a recession with high inflation and millions out of work,” said Senator Elizabeth Warren, a progressive Democrat from Massachusetts. “I hope you’re on it. Will reconsider before you kick this economy off a cliff.”
Powell said on a separate exchange that if the Fed did not act to restore price stability, there would be considerable risk as inflation escalates.
“We know from history that this will hurt the people we want to help, the low income groups who are now suffering from high inflation,” he said. “It will hurt them more than anyone. We can’t fail at that job.”
Concerns have mounted about a possible slowdown this month with worse-than-expected inflation figures. While Powell said the US economy is “very strong and in a good position to handle tough monetary policy,” he acknowledged that further inflationary surprises “may be in store”.
“Therefore we will need to be nimble in responding to incoming data and evolving approaches, and we will try to avoid adding uncertainty to what is already an exceptionally challenging and uncertain time,” he said.
Traders have seen the price of the benchmark federal funds rate climb to nearly 3.6 per cent by year-end, a rise that has led to a broader rise in borrowing costs globally. Powell said Wednesday that tightening financial conditions are already taking effect and demand is slowing.
Powell’s testimony comes at a crucial moment for the White House, which is grappling with rising hopes of a sharp slowdown in growth ahead of November’s midterm elections. Many economists have since decided to get into a recession until next year.
“Nothing about a recession is inevitable,” US President Joe Biden told reporters this week – a message also sent by Janet Yellen, US Treasury secretary, and Brian Deez, director of the National Economic Council.
Fed officials have begun to prepare market participants for at least another 0.75 percentage point increase at their next meeting in July. Powell said Wednesday that the Fed needs to see “compelling evidence” that inflation is easing before relying on its campaign to raise interest rates.
Powell said future decisions about the Fed’s actions will be decided “by meeting.”