Economy · June 22, 2022

Jay Powell Warns US Recession Is “Certainly a Possibility”

Jay Powell said a US recession is “certainly a possibility” and warned that avoiding a recession now largely depends on factors beyond the control of the Federal Reserve.

In a testimony to the Senate Banking Committee on Wednesday, the Fed chairman acknowledged that it is now more difficult for the central bank to eradicate soaring inflation by maintaining a strong job market.

He said the US was resilient enough to resist tighter monetary policy without slipping into a downturn, but acknowledged that external factors, such as the war in Ukraine and China’s policy against Covid-19, could further complicate matters. perspectives.

“That’s not the expected outcome at all, but it’s certainly a possibility,” Powell said, answering a question about the risk that the Fed’s plans to hike rates this year could lead to a recession.

He added that due to the “events of the last few months in the world,” it has been “now more difficult” for the central bank to meet its 2 percent inflation targets and a strong labor market.

“The question of whether we can achieve this will depend to some extent on factors we don’t control,” he said, referring to the surge in commodity prices resulting from the Russian invasion of Ukraine and clogged supply chains to because of the blockade of China.

Lawmakers have repeatedly urged Powell about the burden imposed by the Fed’s recent moves to fight inflation, now at 8.6%, the highest in four decades. The central bank enacted its largest interest rate hike since 1994 last week, signaling its support for what will be the most vigorous monetary policy tightening campaign since the 1980s.

“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work, ”said Elizabeth Warren, the progressive Democratic Senator from Massachusetts. “I hope you will reconsider before plunging this economy off a precipice.”

Powell said in a separate exchange that there would be considerable risks if the Fed did not take action to restore price stability, with inflation consolidating.

“We know from history that this will harm the people we want to help, the people in the lower income bracket who are now suffering from high inflation,” he said. “This will hurt them more than anyone else. We cannot fail in this task. “

At midday, the two-year US Treasury yield, which moves with interest rate expectations, fell by 0.1 percentage point to 3.06 percent. US equity indices rallied with the S&P 500 up 0.2%.

Concerns about a possible recession have increased with worse-than-expected inflation figures this month. While Powell said the US economy is “very strong and well positioned to handle tighter monetary policy,” he acknowledged that more inflation surprises “may be in store.”

“We will therefore need to be agile in responding to incoming data and evolving prospects, and will work to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time,” he said.

Traders priced the federal funds benchmark rate which reached around 3.6% by the end of the year, an increase that caused a larger increase in borrowing costs globally. Powell on Wednesday said tightening financial conditions are having the expected impact and holding back demand.

Powell’s testimony comes at a critical time for the White House, which is grappling with growing expectations of a sharp slowdown in growth ahead of November’s mid-term elections. Many economists have since marked a recession within the next year.

“There is nothing inevitable in a recession,” President Joe Biden told reporters this week, a message also sent by Janet Yellen, US Treasury Secretary, and Brian Deese, Director of the National Economic Council.

Fed officials began preparing market participants for at least one more 0.75 percentage point rate hike at their next meeting in July. Powell on Wednesday said the Fed needs “compelling evidence” that inflation is moderating before it gives in to its drive to raise interest rates.

Powell said future decisions on Fed stock will be decided on a “meeting by meeting” basis.