Powell’s Clear Message: Inflationary War Can Cause Recession – KSL.com | Jewelry Dukan

Federal Reserve Chairman Jerome Powell addresses a news conference at the Federal Reserve Board Building in Washington on Wednesday. The Federal Reserve on Wednesday delivered its most blunt assessment of what it will take to finally tame painfully high inflation: slower growth, higher unemployment and a possible recession. (Jacquelyn Martin, Associated Press)

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WASHINGTON — The Federal Reserve on Wednesday delivered its most blunt account of what it will take to finally tame painfully high inflation: slower growth, higher unemployment and a possible recession.

At a news conference, Chairman Jerome Powell conceded what many economists have been saying for months: that the Fed’s goal is a “soft landing,” where it would be able to slow growth enough to curb inflation, but not like that very much that it will cause a recession – seems increasingly unlikely.

“The odds of a soft landing,” Powell said, “are likely to decrease” as the Fed steadily hikes borrowing costs to curb the worst inflationary wave in four decades. “No one knows if this process will lead to a recession, or if so, how deep that recession would be.”

Before Fed policymakers would consider halting rate hikes, they would need to see persistently slow growth, a “modest” rise in unemployment and “firm evidence” that inflation is returning to its 2% target.

“We have to get inflation behind us,” Powell said. “I wish there was a painless way to do this.

Powell’s comments followed another significant three-quarters hike in interest rates — the third in a row — by the Fed’s policymaking body. Their latest action brought the Fed’s short-term policy rate, which affects many consumer and business loans, to 3% to 3.25%. This is the highest level since early 2008.

Falling gas prices have slightly reduced headline inflation, which was still a painful 8.3% yoy in August. Those falling prices at the pump may have contributed to a recent surge in public approval ratings for President Joe Biden, which Democrats hope will boost their prospects in November’s midterm elections.

On Wednesday, Fed officials also forecast further massive rate hikes, raising its benchmark interest rate to around 4.4% by the end of the year – a full point higher than they had forecast in June. And they expect to raise the rate back to around 4.6% next year. That would be the highest level since 2007.

By raising lending rates, the Fed is making it more expensive to get a mortgage, car loan, or business loan. Consumers and businesses are then likely to borrow and spend less, cooling the economy and slowing inflation.


We have to get inflation behind us. … I wish there was a painless way to do this. There is not any.

–Federal Reserve Chairman Jerome Powell


Other major central banks are also taking aggressive steps to combat global inflation, fueled by the global economy’s recovery from the COVID-19 pandemic and then Russia’s war in Ukraine. On Thursday, the British central bank increased its key interest rate by half a percentage point – to the highest level in 14 years. It was the Bank of England’s seventh consecutive move to raise borrowing costs at a time of rising food and energy prices that have fueled a severe cost-of-living crisis.

This month, the Swedish central bank raised its key interest rate by a full point. And the European Central Bank has made its largest rate hike yet, raising three quarters of a point for the 19 countries that use the euro currency.

In their quarterly economic forecasts on Wednesday, Fed policymakers also projected that economic growth will remain weak for the next several years, with unemployment rising to 4.4% from its current level of 3.7% by the end of 2023. Economists say that historically, whenever unemployment rose by half a point for several months, a recession followed.

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

Fed officials now expect the economy to grow just 0.2% this year, well below their forecast of 1.7% growth just three months ago. And they project sluggish growth below 2% from 2023 to 2025. Even with the steep rate hikes the Fed forecasts, it still expects core inflation — which excludes volatile food and gas costs — to end 2023 at 3.1%, well above its 2% target.

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

Short-term interest rates at the levels the Fed now envisages will force many Americans to pay much higher interest payments on a variety of loans than they have in the recent past. Last week, the average fixed-rate mortgage rate topped 6%, a 14-year high, which explains why home sales have plummeted. Credit card rates are at their highest since 1996, according to Bankrate.com.

Inflation now appears to be fueled increasingly by higher wages and consumers’ steady appetite for spending, rather than the supply shortages that plagued the economy during the pandemic recession. On Sunday, Biden said on CBS’ 60 Minutes that he believes a soft landing for the economy is still possible, and hinted that his administration’s recent energy and healthcare bills would lower drug and healthcare prices.

Federal Reserve Chairman Jerome Powell addresses a news conference at the Federal Reserve Board Building in Washington on Wednesday.  The Federal Reserve stepped up its fight against chronically high inflation, raising interest rates by a whopping three-quarters point for the third straight month, an aggressive pace that increases the risk of an eventual recession.
Federal Reserve Chairman Jerome Powell addresses a news conference at the Federal Reserve Board Building in Washington on Wednesday. The Federal Reserve stepped up its fight against chronically high inflation, raising interest rates by a whopping three-quarters point for the third straight month, an aggressive pace that increases the risk of an eventual recession. (Photo: Jacquelyn Martin, Associated Press)

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

Still, some economists are beginning to express concern that the Fed’s rapid rate hikes – the fastest since the early 1980s – will do more economic damage than is needed to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation – are flattening and even declining somewhat through some measures.

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

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

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

Contribution: Paul Wiseman

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