Fed Chairman Powell tries to reassure the public that interest rate hikes won’t cause a deep recession
The last time the Federal Reserve faced inflation as high as it is nowin the early 1980s, he drove interest rates up to double-digit levels and in the process caused a deep recession and a sharp rise in unemployment.
On Thursday, Chairman Jerome Powell suggested that this time the Fed wouldn’t have to go that far.
“We think we can avoid the very high social costs that Paul Volcker and the Fed had to put in place to bring down inflation,” Powell said in an interview with the Cato Institute, referring to the Fed chairman at the start. 1980s that sent short-term borrowing rates to about 19% to curb extremely high inflation.
Powell also reiterated that the Fed is determined to reduce inflation, now near a four-decade high of 8.5%, by raising its short-term rate, which is in a range of 2.25% to 2.5%.
Even so, he did not comment on what the Fed might do at its next meeting in two weeks. Economists and traders on Wall Street are increasingly expecting the central bank to raise its short-term policy rate by three-quarters of a point for the third consecutive time. That would extend the fastest run of rate hikes since Volcker’s days.
The Fed’s benchmark rate is affecting many personal and business loans, meaning borrowing costs across the economy will likely continue to rise.
Thursday, the European Central Bank increased its key rate three-quarters of a point, the biggest in its relatively short history, as Europe also grapples with record inflation and a faltering economy.
Central banks around the world are scrambling to keep up with rising prices. The Bank of Canada raised rates by 0.75 percentage points on Wednesday and earlier this week the Reserve Bank of Australia implemented a half-point increase.
Despite Powell’s reassurances, many economists worry that the Fed will have to let unemployment rise much more than currently expected to bring inflation back to its 2% target.
The Fed has projected that unemployment will only rise to 4.1% by the end of 2024, as higher rates bring inflation down. New search published Thursday under the auspices of the Brookings Institution says such a scenario requires “fairly optimistic” assumptions and finds that unemployment may have risen much more to bring inflation down.
Powell warned two weeks ago at an economic conference in Jackson Hole, Wyoming, that the Fed’s inflation-fighting efforts will inevitably “suffer households and businesses.” But, he added, “a failure to restore price stability would result in far greater pain.”
Yet on Thursday, he reiterated that the Fed’s goal is to achieve a “soft landing,” in which it manages to slow the economy enough to defeat high inflation, but not so much as to tip it into a tailspin. recession.
“What we hope to achieve,” the Fed Chairman said, “is a period of below-trend growth, which will lead to a better balance in the labor market, and then that will bring wages back to levels more consistent with 2 % inflation over time.
Other central bank officials have recently echoed Powell’s message.
“We’re not trying to cause a recession,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview with MNI newswire on Wednesday. “We are trying to organize a slowdown or moderation of activity.”
At the same time, Mester acknowledged that the Fed’s rate hikes will likely lead to job losses and be “painful in the short term.”
And Fed Vice Chairman Lael Brainard also in the remarks wednesdaypointed out that there are signs that supply chain issues are easing, which could boost factory output and moderate prices.
In addition, she noted that automakers and retailers enjoy large profit margins when goods are scarce and Americans spend heavily. As consumers begin to recoil from high inflation, Brainard said, retailers and automakers may need to cut prices to boost sales. This would help slow down inflation.
Yet many economists argue that as borrowing rates continue to rise, employers will cut jobs, consumers will cut back on spending, and eventually a downturn will ensue. And some have issued harsher warnings about the consequences of the Fed’s aggressive pace of rate hikes.
Larry Summers, Treasury Secretary under President Bill Clinton, said he believes the unemployment rate, now 3.5%, may need to reach 7.5% for two years to bring inflation down to near Fed’s 2% target.
The new newspaper published on Thursday concluded that the Fed may need to raise unemployment as high as Summers suggested to curb inflation. The research, led by Laurence Ball, an economist at Johns Hopkins, and two colleagues, found that the pandemic has made the labor market less efficient at matching the unemployed with jobs – a trend that would accelerate unemployment as the economy economy weakens.
Additionally, Americans expect higher inflation in the coming years, according to the research. Typically, when this happens, employees demand a higher wage and their employers raise prices to compensate for their increased labor costs, thus fueling inflation. As prices accelerate, the Fed feels pressure to step up its rate hikes, putting the economy at even greater risk.
Yet not all economists accept this darker scenario. Jan Hatzius, an economist at Goldman Sachs, argued in a note earlier this week that there were “some encouraging signs” that a soft landing is still possible.
Hatzius cited slowing economic growth, lower job openings, lower hiring and lower oil and other commodity prices as factors likely to lower inflation in the coming months. without requiring a recession.
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