Jerome Powell to Investors: Buckle up to recession, unemployment

WASHINGTON (AP) – The Federal Reserve on Wednesday expressed its most candid showdown on what it will take to finally tame painfully high inflation: slower growth, higher unemployment and potentially a recession.

Speaking at a press conference, President Jerome Powell acknowledged what many economists have been saying for months: that the Fed’s goal of designing a “soft landing”, where it would be able to slow growth enough to curb inflation but not enough to cause a recession – it seems increasingly unlikely.

“The chances of a soft landing,” Powell said, “are likely to decline” as the Fed steadily raises borrowing costs to slow the worst inflation round in four decades. “Nobody knows if this process will lead to a recession or, if so, how significant that recession would be.”

Before Fed policymakers consider stopping their rate hikes, he said, they should see continued slow growth, a “modest” rise in unemployment and “clear evidence” that inflation is returning to their own. target of 2%.

“We have to have inflation behind us,” Powell said. “I wish there was a painless way to do it. There is not.

Powell’s remarks followed another substantial three-quarters of a point rate hike – the third in a row – by the Fed’s policy committee. consumers and businesses, from 3% to 3.25%. It is the highest level since the beginning of 2008.

The drop in gas prices slightly lowered headline inflation, which was still painful 8.3% in August compared to the previous year. Those falling prices at the gas pump may have contributed to a recent hike in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in November’s mid-term election.

On Wednesday, Fed officials also predicted further hikes of enormous size, raising the benchmark rate to around 4.4% by the end of the year, one point higher than expected through June. And they plan to raise the rate again next year, to around 4.6%. It would be the highest level since 2007.

By raising loan rates, the Fed makes it more expensive to take out a mortgage or a car or business loan. Consumers and businesses presumably borrow and spend less, cooling the economy and slowing inflation.

Other major central banks are also taking aggressive steps to combat global inflation, which has been fueled by the recovery of the global economy from the COVID-19 pandemic and then Russia’s war against Ukraine. On Thursday, the UK central bank raised its benchmark interest rate by half a percentage point, to its 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, which fueled a major cost-of-living crisis.

This month, the Swedish central bank raised its benchmark interest rate by one point. And the European Central Bank achieved its largest rate hike ever with a three-quarter point hike for the 19 countries using the euro.

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

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

Fed officials now forecast the economy to be only 0.2% this year, expanding significantly below their 1.7% growth forecast just three months ago. And they predict slow growth below 2% from 2023 to 2025. Even with the Fed’s predicted steep rate hikes, he still expects core inflation – which excludes volatile food and gas costs – to be 3. 1% at the end of 2023, well above its 2% target.

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

Short-term rates at a level the Fed now predicts will force many Americans to pay much higher interest on a variety of loans than in the recent past. Last week, the average rate on a fixed mortgage surpassed 6%, its highest point in 14 years, which helps explain why home sales plummeted. Credit card rates have 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 shortage that plagued the economy during the pandemic recession. On Sunday, Biden stated on CBS’s “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health legislation would lower the prices of pharmaceuticals and health care products. sanitary.

The law can help reduce the prices of prescription drugs, but external analysis suggests it will do little to immediately reduce headline inflation. Last month, the non-partisan Congressional Budget Office felt it would have a “negligible” effect on prices until 2023. The University of Pennsylvania Penn Wharton Budget Model went even further by stating that “the impact on inflation is statistically indistinguishable. from scratch “in the next decade.

Nonetheless, 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 necessary 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 stabilizing and with some measures even somewhat declining.

Polls also show that Americans expect a significant drop in inflation over the next five years. This is an important trend because inflation expectations can come true: if people expect inflation to fall, some will feel less pressure to accelerate their purchases. Lower spending would therefore help moderate price increases.

The Fed’s rapid rate hikes mirror the steps taken by other major central banks, contributing to concerns about a potential global recession. Last week the European Central Bank raised the reference 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 large rate hikes in recent weeks.

And in China, the second largest economy in the world, growth is already suffering from the government’s repeated COVID blockades. If the recession affects most large economies, it could derail the US economy as well.

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AP Economics writer Paul Wiseman contributed to this report.

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