Federal Reserve Chair Jerome Powell told US lawmakers that while the economy remains strong, a recession triggered by interest rate hikes remains a “possibility”
The US economy remains strong but a series of aggressive rate hikes meant to cool soaring inflation could eventually trigger a recession, Federal Reserve Chair Jerome Powell cautioned Wednesday.
Powell, whose testimony before senators was closely watched by investors and analysts, also said the world’s largest economy faces an “uncertain” global environment and could see further inflation “surprises.”
Last week, the US central bank announced the sharpest interest rate increase in nearly 30 years and promised additional similar moves to combat the price surge, with gas and food costs skyrocketing and millions of Americans struggling to get by.
“It’s not our intended outcome at all, but it’s certainly a possibility,” he told the Senate Banking Committee.
In his opening remarks, Powell insisted the US economy “is very strong and well positioned to handle tighter monetary policy.”
Policymakers “will need to be nimble” given that the economy “often evolves in unexpected ways,” he said.
Last week’s super-sized 0.75-percentage-point increase in the benchmark lending rate was the third since March, taking the policy rate up a total of 1.5 points. Powell at the time said a similar increase was likely in July.
“I think it’s going to be very challenging,” Powell said, insisting there are “pathways” to avoid recession, and that he does not view the risk of a downturn as “particularly elevated.”
But Wall Street stocks lost steam late in the trading session, and the Dow finished the day down 0.2 percent.
In addition to easing the financial strain on less-wealthy American families, the Fed chief said tamping down inflation was “essential” to maintain a healthy labor market.
But the buoyant demand for homes, cars and other goods clashed with transportation and supply chain snarls in parts of the world where Covid-19 has remained a challenge.
But Powell noted that inflation is a global issue, not unique to the United States.
Powell said many factors driving inflation are beyond the Fed’s control, but he pointed to signs that rising rates are having an impact, as business investment slows and “activity in the housing sector looks to be softening, in part reflecting higher mortgage rates.”
“The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply,” Powell said.
Originally published as US Fed chair admits recession a ‘possibility’ after rate hikes