Powell: Fed aiming to avoid recession amid inflation fight
Federal WASHINGTON — 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, which has surged to the top of Americans’ concerns as congressional elections near.
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 Powell Fed had moved too slowly to begin raising rates and now must speed up hikes and endanger the economy.
While the Fed’s primary goal now is to reduce inflation, Powell stressed, he still hopes to achieve what he has called a “soft landing” — a reduction in inflation and a slowdown in growth without triggering a recession and high unemployment.
“I don’t think we need to provoke a recession,” Powell said on the first of two days of testimony as part of the Fed’s semiannual report to Congress. “But 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.”
He said the pace of future rate hikes will depend on whether — and how quickly — inflation starts to decline, something the Fed will assess on a “meeting by meeting” basis.
The central bank’s accelerating pace of rate increases — it started with a quarter-point hike in its key short-term rate in March, then a halfpoint increase in May, then three-quarters of a point last week — has alarmed investors and led to sharp declines in the financial markets.
Powell’s testimony comes exactly a week after the Fed announced its three-quarters-of-a-point increase, its biggest hike in nearly three decades, to a range of 1.5% to 1.75%. With inflation at a 40-year high, the Fed’s policymakers also forecast a more accelerated pace of rate hikes this year and next than they had predicted three months ago, with its key rate reaching 3.8% by the end of 2023. That would be its highest level in 15 years.
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, saying the Fed’s hikes “are long overdue” and that its benchmark short-term rate should go much higher.