Jay Powell said a recession in the United States was “certainly possible” and warned that avoiding a downturn now depended largely on factors beyond the control of the Federal Reserve.
In a testimony to the Senate Banking Committee on Wednesday, the Fed chairman acknowledged that it is now more challenging for the central bank to eradicate rising inflation while maintaining a strong labor market.
He argued that the United States was resilient enough to withstand tighter monetary policy without slipping into decline, but acknowledged that external factors such as the war in Ukraine and China’s Covid-19 policy could further complicate the outlook. .
“This is not our expected result at all, but it is certainly possible,” Powell said, answering a question about the risk that the Fed’s plans to raise interest rates this year could lead to a recession.
He added that due to “the events of the last few months around the world”, it is “now more difficult” for the central bank to achieve its goals of 2% inflation and a strong labor market.
“The question of whether we can achieve this will depend to some extent on factors beyond our control,” he said, referring to rising commodity prices stemming from Russia’s invasion of Ukraine and congested supply chains due to the blockade in China. .
Powell has been pressured several times by lawmakers over the burden imposed by the Fed’s recent actions to fight inflation, which is now 8.6 percent, the highest level in four decades. The central bank last week introduced the biggest interest rate hike since 1994, signaling support for what is expected to be the strongest campaign to tighten monetary policy since the 1980s.
“Do you know what’s worse than high inflation and low unemployment?” It’s a high inflation and recession with millions of unemployed people, “said Elizabeth Warren, a progressive senator from the Massachusetts Democrats. “I hope you will rethink this before driving this economy off the cliff.”
Powell said in a separate exchange that there would be significant risks if the Fed did not take action to restore price stability as inflation rose.
“We know from history that this will harm the people we would like to help, the lower-income people who are now suffering from high inflation,” he said. “It simply came to our notice then. We cannot fail this task. “
Concerns about a possible recession have risen with worse-than-expected inflation data this month. While Powell said the US economy was “too strong and well-positioned to cope with tighter monetary policy”, he acknowledged that further surprises in inflation “could be expected”.
“Therefore, we will have to be agile in responding to inputs and changing perspectives, and we will strive to avoid adding uncertainty to what is already an extremely challenging and uncertain time,” he said.
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Traders set the reference rate for federal funds, reaching approximately 3.6% by the end of the year, an increase that led to a larger increase in borrowing costs worldwide. Powell said on Wednesday that tightening financial conditions was already having the expected effect and reducing demand.
Powell’s testimony comes at a critical time for the White House, which is battling growing expectations of a sharp slowdown in growth ahead of the November midterm elections. Since then, many economists have drawn a recession until next year.
“Nothing is inevitable in a recession,” US President Joe Biden told reporters this week, a statement also sent by Janet Yellen, the US Treasury Secretary and Brian Deese, director of the National Economic Council.
Fed officials began preparing market participants for at least another 0.75 percentage point increase in interest rates at their next meeting in July. Powell said Wednesday that the Fed needs to see “convincing evidence” that inflation is slowing before it weakens in an effort to raise interest rates.
Powell said future decisions on the Fed’s actions would be decided “meeting by meeting.”
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