Federal Reserve Chair Jerome Powell gave his most explicit acknowledgment to date that steep interest-rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”
“The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers on Wednesday. “We can’t fail on that task. We have to get back to 2% inflation.”
The Fed chair was testifying before the Senate Banking Committee during the first of two days of congressional hearings. In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate,” to cool the hottest price pressures in 40 years.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” said Powell, who appears before the House Financial Services Committee on Thursday.
The Federal Open Market Committee last week raised its benchmark lending rate 75 basis points — the biggest increase since 1994 — to a range of 1.5% to 1.75%. Powell told reporters after the meeting that another 75 basis-point increase, 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 chair faced a barrage of questions about the risk of recession, with economists increasingly flagging the likelihood of a downturn sometime in the next two years.
The Fed chief also said that he did not see the likelihood of a recession as particularly elevated right now, but conceded that it was “certainly a possibility,” noting that recent events have made it harder for the Fed to lower inflation while sustaining a strong labor market.
