Powell warns that path to avoiding recession has ‘narrowed’ as Fed hikes rates

Powell warns that path to avoiding recession has ‘narrowed’ as Fed hikes rates


The Federal Reserve on Wednesday pulled the trigger on another supersized interest rate hike, ushering in an end to easy money policies in its bid to battle the worst inflation since Ronald Reagan’s presidency.

Fed officials increased rates by three-quarters of a percentage point, bringing their main policy rate to its highest level since 2019. The central bank has signaled it will raise borrowing costs further throughout the year, which would make debt more expensive than at any time since the 2008 financial crisis.

The move signals the central bank’s determination to do whatever it takes to kill the spike in inflation, despite warnings from critics such as Sen. Elizabeth Warren that the Fed is unnecessarily jeopardizing a healthy job market over price increases that are driven by factors outside its control.

“We’re not trying to have a recession, and we don’t think we have to,” Fed Chair Jerome Powell said at a press conference after the policymaking committee’s decision. But he acknowledged that the path to avoiding an economic contraction has “narrowed and may narrow further.”

The central bank slashed rates at the beginning of the pandemic to encourage lending and boost growth as the economy entered a brief but deep recession. With its move Wednesday, it has removed that support for the economy. That means that now the Fed will be taking inflation on more directly and its moves could cut into growth more severely.

The Fed’s actions have contributed to a slowdown, raising fears that the U.S. might already have tipped into a recession. Manufacturing output is slowing, wage growth is decelerating and the housing market is cooling, all signs that rate hikes are starting to wend their way through the country. On Thursday, the government reports on the April-June GDP numbers, which the Atlanta Fed says could show the economy shrank for the second straight quarter.

Still, Powell said that while the rate hikes “have been large and they’ve come quickly,” it’s likely that “their full effect has not been felt by the economy.”

“Over the coming months, we will be looking for compelling evidence that inflation is moving down consistent with inflation returning to 2 percent,” he said. “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then.”

This is the fourth time the central bank has raised rates this year, and the second time it has opted for a 0.75 percentage point increase, three times the standard size. The 75-basis-point hike lifted the Fed’s benchmark to a range of 2.25 percent to 2.5 percent target.

Employment growth has been by far the most positive trend in the economy as the U.S. has emerged from the depths of the pandemic. The economy added a net 372,000 jobs in June, a surprisingly rapid pace given that the unemployment rate already sits at a low 3.6 percent. But the labor market is showing signs of cracks in the face of higher rates, with jobless claims reaching their highest weekly level since mid-November.

Ideally, the Fed would bring down inflation without significantly hurting wages. But the harder the central bank hits the brakes on the economy, the more that will cut into hiring and lead to layoffs and pay cuts.

Powell suggested that the Fed was willing to tolerate higher unemployment in its effort to bring down inflation, though he pointed to the high number of job openings as evidence that the labor market has room to cool without causing too much pain.

But he said “price stability is the bedrock of the economy,” arguing that cooling price spikes is the way to help workers’ wages outpace inflation. “We can’t have a strong labor market without price stability,” he said.

Financial markets have also weathered the rise in borrowing costs without significant disruptions in how they function, he said.

“There’s been some volatility but that’s to be expected.”

Powered by WPeMatico

Comments are closed.
%d bloggers like this: