Jay Powell said a US recession is “certainly a possibility” and warned that avoiding a recession now depends largely on factors beyond the Federal Reserve’s control.
In testimony to the Senate banking committee on Wednesday, the Fed chairman acknowledged that it was now more challenging for the central bank to stamp out rising inflation while maintaining a strong job market.
He argued that the US is resilient enough to withstand tougher monetary policy without falling into recession, but acknowledged that external factors such as the war in Ukraine and China’s Covid-19 policy could further complicate the outlook.
“It’s not our intended outcome, 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 the “events of recent months around the world”, it was “now more difficult” for the central bank to achieve its targets of 2 percent inflation and a strong labor market.
“The question of whether we are able to achieve this will depend, to some extent, on factors that we do not control,” he said, referring to rising commodity prices stemming from the Russian invasion of Ukraine and clogged supply chains. due to Chinese blockades.
Powell has been pressed several times by lawmakers about the burden imposed by the Fed’s recent measures to fight inflation, now at 8.6%, the highest in four decades. Last week, the central bank put in place the biggest interest rate hike since 1994, signaling its support for what must be the most vigorous campaign to tighten monetary policy since the 1980s.
“You know what’s worse than high inflation and low unemployment? It’s high inflation and recession with millions of people out of work,” said Elizabeth Warren, the progressive Democratic senator from Massachusetts. “I hope you reconsider that before you take this economy to a precipice.”
Powell said on a separate exchange that there would be considerable risks if the Fed did not act to restore price stability, with inflation consolidating.
“We know from history that this will hurt the people we would like to help, the people on the lower income spectrum who are now suffering from high inflation,” he said. “This is going to hurt them more than anyone. We cannot fail in this task.”
At midday, the two-year US Treasury yield, which moves on interest rate expectations, dropped 0.1 percentage point to 3.06%. US stock indexes rose with the S&P 500 up 0.2%.
Concerns about a possible recession grew with worse-than-expected inflation data this month. While Powell maintained that the US economy is “very strong and well positioned to deal with tighter monetary policy”, he acknowledged that more inflationary surprises “may be in store”.
“Therefore, we will need to be agile in responding to incoming data and evolving perspectives, and we will strive to avoid adding uncertainty at a time that is already extraordinarily challenging and uncertain,” he said.
Traders priced in the federal funds benchmark interest rate reaching around 3.6% by the end of the year, a rise that has caused a broader rise in borrowing costs around the world. Powell said on Wednesday that tightening financial conditions are already having their intended impact and dampening demand.
Powell’s testimony comes at a critical time for the White House, which faces rising expectations of a sharp slowdown in growth ahead of the November election. Since then, many economists have projected a recession next year.
“There is nothing inevitable about a recession,” US President Joe Biden told reporters this week — a message also sent by Janet Yellen, 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 interest rate hike at their next meeting in July. Powell said Wednesday that the Fed needs to see “compelling evidence” that inflation is moderating before relenting in its bid to raise interest rates.
Powell said future decisions on the Fed’s actions will be decided “meeting by meeting.”