Federal Reserve Chairman Jerome Powell says fighting inflation could cause a recession

WASHINGTON (AP) — The Federal Reserve on Wednesday delivered its starkest assessment of what it will take to finally get painfully high inflation under control: slower growth, higher unemployment and potentially a recession.

Speaking at a press conference, Chairman Jerome Powell acknowledged what many economists have been saying for months: that the Fed’s goal of staging a “soft landing” – in which it would successfully slow enough growth to dampen inflation, but not enough to cause a recession – seems increasingly unlikely.

“The chances of a soft landing,” Powell said, “are likely to diminish” as the Fed steadily raises borrowing costs to slow the worst wave of inflation in four decades. “No one knows if this process will lead to a recession or, if so, how big that recession would be.”

Before Fed policymakers consider halting their rate hikes, he said, they should see continued slow growth, a “moderate” rise in unemployment and “clear evidence” that the inflation is back to its target of 2%.

LOOK: The Fed raises its key rate by three quarters of a point

“We need to put inflation behind us,” Powell said. “I wish there was a painless way to do this. There isn’t.

Powell’s remarks followed another substantial three-quarter point rate hike — his third in a row — by the Fed’s policy-making committee. His latest move raised the Fed’s short-term policy rate, which affects many personal and business loans, from 3% to 3.25%. This is its highest level since early 2008.

Falling gasoline prices slightly lowered headline inflation, which was still a painful 8.3% in August from a year earlier. That drop in gas pump prices may have contributed to a recent boost in President Joe Biden’s approval ratings, which Democrats hope will improve their prospects in November’s midterm elections.

On Wednesday, Fed officials also forecast more jumbo-sized hikes to come, taking their benchmark rate to around 4.4% by the end of the year – one point higher than they considered last June. And they expect to raise the rate again next year, to around 4.6%. It would be the highest level since 2007.

By raising borrowing rates, the Fed is making it more expensive to take out a mortgage or car or business loan. Consumers and businesses are likely to borrow and then spend less, which cools the economy and slows inflation.

Other major central banks are also taking aggressive action to tackle global inflation, which has been fueled by the global economy’s recovery from the COVID-19 pandemic and then Russia’s war on Ukraine. On Thursday, the British central bank raised its key rate by half a percentage point, to its highest level in 14 years. It was the seventh consecutive decision by the Bank of England to raise borrowing costs at a time of rising food and energy prices, fueling a severe crisis in the cost of life.

This month, the Swedish central bank raised its key rate by a full point. And the European Central Bank carried out its largest ever rate hike with a three-quarters point hike for the 19 countries that use the euro.

In their quarterly economic forecast on Wednesday, Fed policymakers also expect economic growth to remain weak over the next few years, with unemployment rising to 4.4% by the end of 2023 from its current level of 3.7. %. Historically, economists say, whenever unemployment has risen by half a point over several months, a recession has always followed.

“So the (Fed) forecast is an implicit admission that a recession is likely, unless something extraordinary happens,” said Roberto Perli, economist at Piper Sandler, an investment bank.

LOOK: Inflation remains stubbornly high, raising fears of further interest rate hikes

Fed officials now forecast economic growth of just 0.2% this year, significantly lower than their forecast for growth of 1.7% just three months ago. And they see slow growth below 2% from 2023 to 2025. Even with the big rate hikes planned by the Fed, it still expects underlying inflation – which excludes the volatile costs of l gas – or 3.1% at the end of 2023, well above its target of 2%.

Powell warned in a speech last month that the Fed’s actions would “cause pain” for households and businesses. And he added that the central bank’s commitment to bringing inflation back to its 2% target was “unconditional”.

Short-term rates at a level the Fed is now considering will force many Americans to pay much higher interest on a variety of loans than in the recent past. Last week, the average fixed mortgage rate rose above 6%, its highest level in 14 years, which explains why home sales fell. Credit card rates hit their highest level since 1996, according to Bankrate.com.

Inflation now appears increasingly fueled by higher wages and consumers’ constant desire to spend and less by the supply shortages that had plagued the economy during the pandemic recession. On Sunday, Biden told CBS’s “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting his administration’s recent energy and health care legislation would lower prices of pharmaceuticals and health care.

The law may help reduce prescription drug prices, but outside analysis suggests it will do little to immediately reduce headline inflation. Last month, the nonpartisan Congressional Budget Office ruled that this would have a “negligible” effect on prices through 2023. University of Pennsylvania’s Penn Wharton budget model went even further, saying that “the impact on inflation is statistically indistinguishable from zero” over the next decade. .

READ MORE: How Homebuyers of Color Are Disproportionately Affected by Rising Mortgage Rates

Even so, some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than needed to bring inflation under control. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and wage increases – a key driver of inflation – are stabilizing and, by some measures, even declining a little.

Polls also show that Americans expect inflation to come down significantly over the next five years. This is an important trend because inflation expectations can become self-fulfilling: if people expect inflation to fall, some will feel less pressure to accelerate their purchases. Less spending would then contribute to moderating price increases.

The Fed’s rapid rate hikes mirror actions taken by other major central banks, contributing to concerns about a possible global recession. The European Central Bank last week raised its key interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all made big rate hikes in recent weeks.

And in China, the world’s second largest economy, growth is already suffering from repeated government blockages. If the recession sweeps through most major economies, it could also derail the US economy.

AP Economics Writer Paul Wiseman contributed to this report.

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