Jay Powell seeks to allay recession fears but warns of inflation surprises

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Jay Powell sought to alleviate fears about an impending recession even as he warned that further surprises on inflation could be in store.

In testimony to the Senate banking committee on Wednesday, the US Federal Reserve chair said the economy could handle significantly tighter monetary policy, as he stressed the central bank’s commitment to root out the highest inflation in four decades.

But concerns about a possible recession have grown more pronounced in recent weeks as inflation data have come in worse than expected.

“The American economy is very strong and well positioned to handle tighter monetary policy,” Powell said in prepared remarks highlighting the resilience of the US consumer and the labour market, where employment has grown on average by roughly 400,000 a month.

But he underscored uncertainty affecting the outlook, moving beyond past comments acknowledging the path to achieving a “soft landing” has become more challenging.

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” he warned.

“We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time.”

The central bank last week implemented the biggest interest rate increase since 1994, lifting the federal funds rate to a new target range of 1.50 to 1.75 per cent, and signalling its support for what is poised to be the most aggressive campaign to tighten monetary policy since the 1980s.

Powell’s testimony comes at a critical moment for the White House, which is trying to manage mounting expectations of a sharp slowdown in growth heading into November’s midterm elections. Many economists have since pencilled in a recession by next year.

“There’s nothing inevitable about a recession,” US president Joe Biden told reporters this week — a message that has also been sent by Janet Yellen, the US Treasury secretary, and Brian Deese, the director of the National Economic Council.

Fed officials have begun to prepare market participants for at least one more 0.75 percentage point rate rise at their next meeting in July, in anticipation that the central bank’s threshold for needing to see “compelling evidence” that inflation is moderating will not have yet come to fruition.

Powell said future decisions about the Fed’s policy action will be decided “meeting by meeting” depending on “incoming data and the evolving outlook for the economy”.

Elizabeth Warren, the progressive senator from Massachusetts, pressed Powell about the costs associated with the Fed’s tightening, tools the chair conceded would likely not tame soaring food and energy prices.

“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with million of people out of work,” said Warren. “I hope you will reconsider that before you drive this economy off a cliff.”

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