Powell: ‘Soft landing’ still Fed’s inflation policy goal
Members of both parties skeptical on plans to slow growth, avoid recession
WASHINGTON — Federal Reserve Chair Jerome Powell sought Wednesday to reassure the public that the Fed will raise interest rates high and fast enough to quell inflation, without tightening credit so much as to throttle the economy and cause a recession.
Testifying to the Senate Banking Committee, Powell faced skeptical questions from members of both parties about the Fed’s ability to tame inflation.
Democrats wondered whether the Fed’s accelerated rate hikes will succeed in curbing inflation or might instead just tip the economy into a downturn. Several Republicans charged that the Fed under Powell had moved too slowly to begin raising rates and now must speed up its hikes.
Powell acknowledged that a recession is possible as the Fed pushes borrowing costs steadily higher. “It’s not our intended outcome, but it’s certainly a possibility,” he said in response to a question from Sen. John Tester, D-Mont.
Powell stressed that the Fed’s primary goal is to reduce inflation but said he still hopes to achieve a “soft landing” — a reduction in inflation and a slowdown in growth without triggering a recession and high unemployment.
“We do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market as much as anything else,” Powell said on the first of two days of testimony as part of the Fed’s semiannual report to Congress.
He said the pace of future rate hikes will depend on whether — and how quickly — inflation starts to decline.
The central bank’s accelerating rate increases — starting with a quarter-point hike in its key short-term rate in March, then a half-point increase in May, then three-quarters of a point last week — have alarmed investors and led to sharp declines in the financial markets.
Concerns are growing that the Fed will end up tightening credit so much as to cause a recession. This week, Goldman Sachs estimated the likelihood of a recession at 30% over the next year and at 48% over the next two years.
A senior Republican on the Banking Committee, Sen. Thom Tillis of North Carolina, on Wednesday accused Powell of having taken too long to raise rates, and like many other Republicans, also blamed President Joe Biden’s $1.9 trillion financial stimulus package, approved in March 2021, for being excessively large and exacerbating inflation.
Many economists agree that the additional spending contributed to rising prices by magnifying demand even while supply chains were snarled by COVID-19-related shutdowns and labor shortages were driving up wages. Inflation was further worsened by Russia’s invasion of Ukraine.
At Wednesday’s hearing, Sen. Elizabeth Warren, D-Mass., asked whether Powell’s rate hike plans would reduce gas or food prices.
Powell acknowledged that they wouldn’t. Instead, he said, higher borrowing costs for things like mortgages, auto loans and credit cards, resulting directly from the Fed’s hikes, can help slow consumer demand and inflation pressures.