The Federal Reserve’s aggressive interest rate hikes could spark a recession, Chairman Jerome Powell admitted in front of the Senate Banking Committee on Wednesday.
“It’s not our intended outcome at all, but it’s certainly a possibility,” Powell said in response to a question from Sen. Jon Tester, a Democrat from Montana.
The Federal Reserve has been attempting to ensure a so-called soft landing for the U.S. economy, where inflation, which hit a fresh four-decade high in May, is reined in without sparking a recession.
Powell’s Wednesday comments underscore just how difficult a task that may be.
“Frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a strong labor market,” the Fed chair admitted, adding that a soft landing “is going to be very challenging.”
Powell went on to describe how it is “absolutely essential” to bring down inflation, arguing that if high consumer prices become entrenched, it could be even worse for Americans than a recession.
“Over the coming months, we will be looking for compelling evidence that inflation is moving down,” Powell said. “We can’t fail at that task.”
Last week, the central bank increased interest rates for the third time this year in an attempt to combat inflation, which has been supercharged by the war in Ukraine and COVID-19 lockdowns in China in recent months. Fed officials decided to move ahead with a 75 basis point hike, the biggest since 1994, and said they expect to institute a similar hike at their next meeting in July as well.
The Fed chair added that he never said the monetary tightening process was going to be “easy or straightforward,” but he doesn’t think a recession is inevitable, despite the plethora of bearish predictions from Wall Street and former Fed officials.
“We are not trying to provoke and do not think we will need to provoke a recession [to bring down inflation],” he said.
Getting hit from both sides
Powell faced harsh criticism from both sides of the aisle during the hearing, with Republicans questioning why the Fed stuck to its “transitory” inflation narrative for so long, while Democrats denounced the chairman for moving the U.S economy toward a recession with aggressive rate hikes.
Sen. John Kennedy, a Republican from Louisiana, said inflation was hitting his constituents so hard they are “coughing up bones.”
“We got a hell of a mess right now,” Kennedy said while pleading with Powell to act aggressively to fight inflation. “You’re the most powerful man in the United States, maybe in the world.”
On the other hand, Sen. Elizabeth Warren, a Democrat from Massachusetts, argued that the Fed’s tools to combat rising consumer prices are too blunt for the job.
Warren asked Powell whether raising rates would help bring down gas or food prices, which have made up a huge chunk of current inflationary pressures. The Fed chair admitted that his policies will likely have little to no effect in these areas.
Warren went on to argue that the “medicine” the Fed is using in attempts to cure inflation may end up being worse than the inflation itself.
“The medicine needs to be tailored to the specific problem. Otherwise, you could make things a lot worse,” she said. “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. I hope you will reconsider that before you drive this economy off a cliff.”
