A recession is definitely a possibility, admits Fed boss

A recession is definitely a possibility, admits Fed boss

UPDATE DAY

US Federal Reserve (Fed) Chairman Jerome Powell acknowledged to Congress on Wednesday that a rapid rise in interest rates could cause a recession even if it is not the desired effect . 

“It's certainly a possibility,” Mr. Powell replied during a Senate hearing to an elected official who worried about the recessionary consequences of the Fed's monetary policy. “It's not the intended effect at all, but it's certainly a possibility,” said the Fed boss.

“And frankly, events in recent months in the world make it harder for us to achieve what we want to do, get inflation back to 2% while maintaining a strong labor market,” Powell said.

So far the Fed has been saying loud and clear that it can make a soft landing for the economy. But pressed by senators, Mr Powell admitted that a soft landing was going to be “very difficult”.

“It has been made much more difficult in recent months if you think about the war, the prices of raw materials and other problems with supply chains,” he argued. He also noted that the tightness of the labor market was “not sustainable”. “There is a mismatch between supply and demand, with more job offers than applicants,” he explained.

Raising rates is “ painful”

“Whether we will manage” to curb inflation without falling into recession “will depend to some extent on factors that we do not control”, added the Chairman of the Fed.

But he assured that there were still “ways to bring inflation down to 2% without causing such problematic consequences”. Price inflation hit a 40-year high in the US at 8.6% year on year.

”I know higher interest rates are painful, but that's the point. “tool we have to moderate demand”, therefore consumption and price increases, he pleaded.

In his speech, Mr. Powell also assured that the American economy was sufficiently “solid and well positioned to face a monetary tightening”.

He recalled that the Fed had raised key rates in the last three meetings, leading to a 1.5 percentage point increase in the cost of overnight credit. This higher cost of money is reflected in all loans, from mortgages to consumer loans to corporate borrowing.

The Monetary Committee “expects that the increases rates continue,” he warned, and their pace “will depend on economic data.”

“We will make our decisions meeting by meeting,” said the Fed boss, assuring that the Central Bank's communication would be “as clear as possible”.

At its last meeting in mid-June , the Monetary Committee (FOMC) had surprised the markets by deciding at the last minute to tighten the monetary screw by 75 percentage points, an increase not seen for almost 28 years.

“We will strive to avoid adding uncertainty in what is already an extraordinarily difficult and uncertain period,” he pledged.

But “in a rapidly changing economic environment , our policy has adapted and will continue to do so”, he explained.

Economy still “very solid”

Returning to the causes of inflation, Mr. Powell pointed to “soaring crude prices as a result of Russia's invasion of Ukraine” and “COVID-19 related lockdowns in China”. 

“Inflation has also risen rapidly in many foreign economies,” he insisted. It was just announced on Wednesday at 9.1% over one year in May in the United Kingdom.

Mr. Powell painted a picture of a still “very strong” US economy.

“Indicators suggest that real gross domestic product growth accelerated this quarter, with consumer spending remaining strong,” he said. – he assured, after a decline in GDP in the 1st quarter. 

He underlined, on the other hand, a slowdown in business investment and noted the cold snap that is gripping the real estate market “partly reflecting higher mortgage rates”.

Acknowledging that the strength of inflation had surprised the monetary authorities, he warned that “other surprises” could arise, citing in particular China's zero tolerance policy vis-à-vis the Covid-19 which could cause new confinements and therefore new difficulties in the supply chain.