Jay Powell said a US recession is “certainly a possibility” and warned that avoiding a recession now depends largely on factors outside the control of the Federal Reserve.
In testimony before the Senate banking committee on Wednesday, the Fed chairman acknowledged that it was now more difficult for the central bank to eradicate runaway inflation while maintaining a strong labor market.
He argued that the US was resilient enough to withstand tighter 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 our intended result at all, 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 “events in recent months around the world,” it is “more difficult now” for the central bank to achieve its 2 percent inflation targets and a strong labor market.
“The question of whether we are able to achieve that will depend to some extent on factors that we do not control,” he said, referring to the soaring commodity prices stemming from the Russian invasion of Ukraine and clogged supply chains. due to China lockdowns.
Powell was repeatedly pressed by lawmakers about the burden imposed by the Fed’s recent moves to combat inflation, now at 8.6 percent, the highest in four decades. Last week, the central bank implemented the biggest interest rate hike since 1994, signaling its support for what will be the most forceful campaign to tighten monetary policy since the 1980s.
“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions out of work,” said Elizabeth Warren, the progressive Democratic senator from Massachusetts. “I hope he reconsiders that before he drives this economy off a cliff.”
Powell said in a separate exchange that there would be considerable risks if the Fed did not act to restore price stability, with inflation taking hold.
“We know from history that that 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. “That will hurt them more than anyone else. We cannot fail in that task.”
Concerns about a possible recession have increased, with worse-than-expected inflation data this month. While Powell maintained that the US economy is “very strong and well positioned to handle tighter monetary policy”, he acknowledged that “they could be expecting more inflation surprises”.
“Therefore, we will need to be agile in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time,” he said.
Traders have priced in the benchmark fed funds rate to hit roughly 3.6 percent by the end of the year, a rise that has triggered a broader spike in borrowing costs globally. 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 is grappling with rising expectations of a sharp slowdown in growth ahead of November’s midterm elections. Since then, many economists have predicted 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 bracing market participants for at least one additional 0.75 percentage point rate hike at their next meeting in July. Powell said Wednesday that the Fed needs to see “compelling evidence” that inflation is moderating before giving in to its bid to raise interest rates.
Powell said future decisions on Fed actions will be decided “meeting by meeting.”