The Federal Reserve Chairman acknowledged the U.S. central bank's war on inflation could force policymakers to raise interest rates so high that they drag the U.S. economy into a recession.
Powell told lawmakers on Wednesday that it was certainly a possibility. We are not trying to provoke, and do not think we need to provoke a recession, but we do think it is absolutely essential that we restore price stability for the benefit of the labor market. Powell will appear before the House Financial Services Committee Thursday as part of his regular, semi-annual update on monetary policy. Powell pledged that Fed officials will continue to raise interest rates until they see compelling evidence that inflation is starting to cool off from the current 40 year high.
While the central bank is hoping to orchestrate a soft landing between consumer demand and inflation without crushing economic growth, Powell admitted that the task was becoming increasingly difficult.
He said that it is going to be very challenging. It has been made challenging by the events of the last few months, thinking there of the war and of commodities prices, and further problems with supply chains. The testimony came just one week after the by 75 basis points was for the first time since 1994, underscoring how serious policymakers are about tackling the inflation crisis after a string of alarming economic reports. The federal funds rate is the highest since the epidemic began two years ago, between 1.50% and 1.75%.
Adjusted for inflation, that is still in negative territory.
Powell told reporters at a press conference that another increase of 75 basis points or 50 basis points is on the table for July as officials try to catch up with runaway inflation. The benchmark federal funds rate is expected to hit 3.4% by the end of the year and 3.8% by the end of 2023, a big increase from their March projections.
Powell said that over the next few months, we will be looking for compelling evidence that inflation is moving down. We have both the tools we need and the resolve that it will take to restore price stability. The Fed head didn't give any insight on Wednesday about the size of future rate hikes. The odds of a downturn in 2022 or 2023 are all raised by Goldman Sachs, Bank of America and Deutsche Bank, and Powell has conceded that there is a real possibility of a recession.
Hiking interest rates can lead to higher rates on consumer and business loans, which slows the economy by forcing employers to cut back spending. Credit card issuers have raised their rates to 20%, and are close to 6%, the highest since 2008.
Powell said Wednesday that the events of the last few months around the world have made it harder for us to achieve what we want. We never said it was going to be easy or straightforward.