Powell: Fed aims to avoid recession but says it’s possible

WASHINGTON (AP) — 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, 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 its hikes.

Powell acknowledged that a recession is possible as the Fed pushes borrowing costs steadily higher. He 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.

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 rate increases — it started 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 — 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.

The public’s anxiety about inflation has weakened President Joe Biden’s approval ratings and raised the likelihood of Democratic losses in November. While taking some steps to try to ease the burden of inflation, the president has stressed his belief that the ability to curb inflation rests mainly with the Fed.

At Wednesday’s hearing, Sen. Elizabeth Warren, a Democrat from Massachusetts, challenged Powell’s rate hike plans and asked whether they would reduce gas or food prices, some of the highest-profile drivers of inflation. Powell acknowledged that they wouldn’t.

Instead, Powell said that 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.

Yet Warren and other Democrats argued that the Fed’s approach carries the risk of weakening the economy and heightening unemployment even as the war in Ukraine keeps gas and food prices high. Such a dynamic would resemble the dreaded “stagflation” of the 1970s.