By Jeanna Smialek
Jerome Powell, chair of the Federal Reserve, said that the central bank might be able to lower rapid inflation without tipping America into a painful downturn, though he cautioned that pulling it off would be “very challenging” to achieve and that a recession is “certainly a possibility.”
“We’re not trying to provoke, and don’t think that we will need to provoke, a recession,” Powell said while testifying before the Senate Banking Committee on Wednesday. “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market, as much as anything else.”
Powell, who was to return to Capitol Hill to testify again Thursday, is facing a challenging moment. Inflation as measured by the Consumer Price Index is running at 8.6%, the fastest pace in more than four decades, having reaccelerated in May thanks to surging gas prices and airfares. Although the economy remains strong and unemployment is historically low at 3.6%, the fast price increases have prompted the Fed to adjust its policy at an increasingly rapid pace to try to cool demand.
The Fed raised its policy interest rate by three-quarters of a percentage point last week, the largest move since 1994, having lifted the rate by a quarter-point in March and a half-point in May. The escalation comes as central bankers become increasingly concerned about how broad inflation is, touching the prices of goods and services that span the economy, and as they worry that consumer expectations for future price increases have begun to creep up. If people expect faster inflation, they may ask for higher wages to cover costs and prompt employers to charge more thanks to climbing labor costs, setting off an inflationary cycle.
“We do understand the full scope of the problem, and we’re using our tools to address it pretty vigorously now,” Powell said during his testimony. “Price stability is really the bedrock of the economy.”
The Fed’s policies to restrain demand and wrestle inflation lower are expected to hurt the economy. Central bankers themselves predict that unemployment will rise and growth will slow as higher rates take effect, making mortgages, credit card debt and business loans more expensive.
“I think what you will see is continued progress, expeditious progress toward higher rates,” Powell said.
Wall Street investors are concerned that the central bank will set off a recession in its bid to bring inflation lower, and economists have warned that unemployment may need to climb markedly to bring demand down enough that inflation comes back under control. Households are fearful about the future, and consumer confidence is plummeting. Fed officials have reiterated that they are trying to stabilize prices without causing a recession, although they have also acknowledged that pulling that off will be difficult.
Achieving that goal “has been made significantly more challenging by the events of the past few months,” Powell said, citing supply disruptions coming from shutdowns in China and the war in Ukraine that have pushed prices even higher.
Still, he said that the central bank needs to do what it can to rein in price increases, because the other risk is that the Fed will not restore price stability, and high inflation will become entrenched in the economy, hurting low-income people more than anyone else.
“I’m trying to lower demand growth. We don’t know that demand has to actually go down, which would be a recession,” Powell said. He later added that “this is very high inflation, and it’s hurting everybody, and we need to do our job and get inflation back on a path down to 2%.”
Looming economic pain spells trouble for many of the politicians Powell is testifying before this week — particularly the Democrats in power. Voter approval of President Joe Biden has sunk under the weight of inflation, which the administration regularly calls its top priority.
In fact, Biden planned to call on Congress on Wednesday to temporarily suspend the federal gas tax, an effort to slow soaring fuel prices. Passing such a measure could prove challenging, and economists have generally dismissed that policy as having a limited impact, as do most of the measures to fight inflation that the administration has been able to roll out.
The Fed, which is independent of politics, is the country’s main answer to quickly climbing prices. Its policies may be painful, but it is isolated from election cycles so that central bankers can make tough short-term decisions to put the economy on a more stable long-term track.
But the central bank’s policies are not perfectly suited to this moment. Its rates work to slow demand, but many of the factors pushing inflation higher today are linked to supply: China’s attempts to contain the coronavirus have slowed factory production, gas and food costs jumped after Russia invaded Ukraine, and lingering shipping issues that started amid the pandemic have kept some parts and goods out of stock.
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” Powell said Wednesday.
While the White House has stressed the Fed’s central role in fighting inflation, some Democratic senators — including Elizabeth Warren of Massachusetts — questioned whether hurting the economy was the right solution to today’s rapid price increases. Some urged a more tailored approach, even as the White House’s more precise efforts struggle to gain traction.
Powell acknowledged that rate moves would not bring down food or fuel prices but that they affect the economy by making it more costly to spend with borrowed money, pushing down stock and other asset prices, and through global currency adjustments.
“The idea is to moderate demand so that it can be in better balance with supply,” Powell said.