Jay Powell warns US recession is ‘certainly a possibility’

Jay Powell said a recession in the US is a “certain possibility” and cautioned that avoiding an economic downturn now depends largely on factors outside the Fed’s control.

Testifying before the Senate Banking Committee on Wednesday, the Fed chair acknowledged that it is now becoming more difficult for the central bank eradicate rising inflation while maintaining a strong job market.

He said the United States is flexible enough to tolerate tighter monetary policy without sliding into deflation, but acknowledged that external factors, such as the war in Ukraine and China’s policy on COVID-19, could further complicate expectations.

“It’s not the intended outcome at all, but it’s certainly a possibility,” Powell said, when asked about the risks the Fed’s plans to raise interest rates this year could lead to a recession.

He added that due to “the events of the past few months around the world”, it was “now more difficult” for the central bank to achieve its goals of 2 percent inflation and a strong labor market.

He said, referring to the rise in commodity prices caused by the Russian invasion of Ukraine and the clogging of supply chains due to the lockdowns in China.

Lawmakers lobbied Powell several times about the burden imposed by the Fed’s recent anti-inflation moves, Now at 8.6%, the highest in four decades. The central bank last week put in place Larger An interest rate increase since 1994, signaling her support for what is set to be the strongest monetary tightening campaign since the 1980s.

Do you know what’s worse than high inflation and low unemployment? “It’s high inflation and stagnation with millions of people out of work,” said Elizabeth Warren, a progressive Democratic senator from Massachusetts. “I hope you’ll reconsider that before you push this economy off the cliff.”

Powell said on a separate exchange that there will be significant risks if the Fed does not act to restore price stability, with inflation taking hold.

“We know from history that it will hurt the people we want to help, the people in the lower income spectrum who are now suffering from high inflation,” he said. “This will harm them more than anyone else. We cannot fail in this mission.”

By midday, the two-year US Treasury yield, which moves in line with interest rate expectations, fell 0.1 percentage point to 3.06 percent. US stock indices rose, with the S&P 500 gaining 0.2 percent.

Concerns about a possible recession grew worse than expected inflation data for this month. While Powell emphasized that the US economy is “very strong and well-positioned to handle a tighter monetary policy”, Powell acknowledged more inflationary surprises “could be in store”.

“So we will need to be smart in responding to incoming data and evolving forecasts, and we will strive to avoid adding uncertainty at a time that is already an unusually unusual and uncertain time,” he said.

Traders priced the record fed funds rate at nearly 3.6 percent by the end of the year, an increase that caused a broader increase in borrowing costs globally. Powell said on Wednesday that the tightening of financial conditions is having its intended effect and dampens demand.

Powell’s testimony comes at a critical moment for the White House, which is grappling with rising expectations of a sharp slowdown in growth ahead of the November midterm elections. Since then many economists slack pencils by next year.

“There is nothing inevitable about a recession,” President Joe Biden told reporters this week — a message also sent by Janet Yellen, US Treasury Secretary, and Brian Daisy, director of the National Economic Council.

Federal Reserve officials began preparing market participants for at least one 0.75 percentage point increase at their next meeting in July. Powell said on Wednesday that the Fed needs to see “convincing evidence” that inflation is abating before it backtracks on its drive to raise interest rates.

Powell said future decisions on the Fed’s actions will be decided “meet by meeting.”