We Aren’t Trying To Create A Recession, But Fight Inflation – Powell

On Wednesday, Jerry Powell (us Fed chair) spoke at the US senate banking committee hearing about the Fed’s efforts in controlling inflation. During the hearing, Powell admitted that macroeconomic events in the last few months suggest that a recession is likely.

However, Powell remarked that the Fed would take necessary steps to reduce pressures. Then, it can ease off on rate hikes, which started in April.

The Inflation Control Struggle Continues

While the Fed’s target is for inflation to be at 2%, it hasn’t achieved that goal yet. Powell testified that there was a slight reduction in energy costs due to the rate hike last month. However, he added that the Russia-Ukraine war and forced lockdowns in china are preventing the greater effects of the rate hike from manifesting.

Last week, the Fed increased rates to 1.50% and 1.75%. That was the Fed’s most significant rate hike in nearly three decades. But Powell hinted that the Fed still hike rates up to 3.4% within the next six months. Powell and the Fed may be hiking rates to slow down the economy and tame inflation.

However, many analysts are concerned that the Fed’s move is weakening the labor markets and might result in a recession. During the committee hearing, Powell explained that the economic outlook would determine subsequent rate hikes.

The Fed chair added that the Fed might increase rates by 100 basis points if necessary. Powell urged the legislature to respond quickly to the next data release.

According to him, the rise in inflation levels in the last 12 months has been surprising. Then, he added that no one could rule out other surprises before the year was over.

Incoming Data Is Crucial

Many policymakers support Powell’s views regarding inflation. Hence, they agree that the apex bank may still need to increase rates by 75 basis points at its meeting next month. Philadelphia Fed chief Patrick Barker said there are two options before the apex bank. But the next data will determine the option it would take.

Charles Evans (Chicago Fed president) stated that he is not uncomfortable with the successive rate increases. Strangely, he admitted that these rapid rate hikes might cause a recession.

Evans further said the first goal is to ensure that the inflation pressure is no longer there. Many analysts and politicians have criticized Powell for his handling of the inflation issue. The inflation pressures are threatening to become the issue that can tip the balance of power in favor of Republicans in the forthcoming November elections. 

Massachusetts Rep. Sen. Elizabeth Warren, has accused the Fed of not considering the millions it could put out of work by increasing interest rates successively. The Fed’s latest forecasts see a slow-down of economic growth below trend. However, the US unemployment would rise higher than its current 3.6%.