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Powell says recession 'a possibility' but not likely

Federal Reserve chairman Jerome Powell vowed to bring inflation back down to 2%. Some lawmakers worry the Fed's efforts to control inflation could tip the economy into recession.

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Jerome Powell, Chairman, Board of Governors of the Federal Reserve System testifies before the Senate Banking, Housing, and Urban Affairs Committee on June 22, 2022 in Washington, DC.
Jerome Powell, Chairman, Board of Governors of the Federal Reserve System testifies before the Senate Banking, Housing, and Urban Affairs Committee on June 22, 2022 in Washington, DC. Win McNamee/Getty Images

Federal Reserve chairman Jerome Powell says the central bank is committed to regaining control over inflation, even as he acknowledged the Fed has little power to address its most visible symptoms at the gas pump or the supermarket.

Powell addressed the Senate Banking Committee Wednesday, a week after the Fed ordered the largest interest rate increase since 1994. The central bank is under growing pressure to combat inflation, which hit a four-decade high of 8.6% in May.

"We need to get inflation back down to 2%," Powell told lawmakers. "We're using our tools to do that. And the public should believe that we will get inflation back down to 2% over time."

Sen. Elizabeth Warren, D-Mass., cautioned that an abrupt increase in borrowing costs could produce a surge in layoffs, while doing little to untangle supply shocks that have driven up the price of gasoline and groceries.

"You know what's worse than high inflation and low unemployment?" Warren said. "It's high inflation and a recession with millions of people out of work. I hope you'll reconsider that, before you drive this economy off a cliff."

Powell stressed the economy is well-positioned to withstand higher interest rates, although he acknowledged that the war in Ukraine and lingering supply-chain problems increase the risk of an economic slowdown.

"It's certainly a possibility," Powell said. "It's not our intended outcome at all but it's certainly a possibility."

"We're not trying to provoke — and don't think that we will need to provoke — a recession," he added. "But we do think it's absolutely essential that we restore price stability, really for the benefit of the labor market as much as anything else."

A growing number of forecasters now see storm clouds on the horizon. Economists surveyed by the Wall Street Journal put the odds of a recession in the next 12 months at 44%, up from 28% in April.

Powell argued that predicting recessions is notoriously difficult, but added that he doesn't see the risk as particularly high.

"The U.S. economy for now is strong. Spending is strong. Consumers are in good shape. Businesses are in good shape," Powell said. "Monetary policy is famously a blunt tool. And there's risk that weaker outcomes are certainly possible. But they're not our intent."

After keeping interest rates near zero for the first two years of the pandemic, the Fed is now moving aggressively to increase borrowing costs in a bid to tamp down demand. The Fed's benchmark rate has jumped to 1.6%, and additional rate hikes are expected in the coming months.

Mortgage rates have climbed sharply in anticipation of the Fed's moves, and that's beginning to weigh on both home sales and home construction.

Some Republicans on the committee faulted the Fed for waiting too long to crack down on inflation, and blamed the $1.9 trillion dollar relief bill passed by Congressional Democrats last year for fueling consumer demand.

"The Federal Reserve and this administration failed the American people by not heeding these warnings a year ago, and not acting sooner to address it," said Sen. Richard Shelby, R-Ala.

Powell and other officials have admitted that they initially misjudged both the severity and the staying power of inflation. But the Fed chairman insists he's determined to bring prices under control.

"We have the tools and the resolve and hopefully the judgement to accomplish that task," Powell said.

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Transcript :

AILSA CHANG, HOST:

The nation's top inflation fighter found himself in the hot seat this morning. Federal Reserve Chairman Jerome Powell took questions from a Senate committee about why prices have been climbing at such an alarming rate. And senators also wanted to know if the Fed's cure for high prices might have some nasty economic side effects. Joining us now to talk about Powell's testimony is NPR's Scott Horsley. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: All right. So just a week ago, the Fed, they ordered a big jump in interest rates - right? - as it's trying to get a handle on inflation. How are lawmakers responding to that particular move?

HORSLEY: You know, in general, Powell commands a lot of respect from both Democrats and Republicans. Members of Congress certainly know how unhappy people are about inflation, and they very much want the Fed to get this problem under control. That said, there was some grumbling about the timing of the Fed's move. All last year, as prices started to climb, the Fed was leaving interest rates close to zero. Powell and his colleagues thought prices would level off on their own once the pandemic receded. That didn't happen, of course, and instead, annual inflation hit a 40-year high last month. Republican Senator Richard Shelby complains the Fed waited too long to act and says now they're having to play catch up.

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RICHARD SHELBY: The consequences of being wrong on inflation are now being felt by American families and workers across the country. And despite the recent decision to raise interest rates, the Federal Reserve still has a long way to go to get inflation under control.

HORSLEY: Indeed, the Fed's own forecasts suggest interest rates will have to climb significantly higher before they start putting the brakes on inflation. Mortgage rates have already jumped sharply in anticipation of that. And you are starting to see the effects with the slowdown in the housing market.

CHANG: Well, does Powell agree with Shelby that the Fed waited too long to start raising rates?

HORSLEY: Powell has conceded that in hindsight, the Fed might have acted sooner. He's acknowledged the supply chain problems he and others thought would be temporary turned out to be longer lasting. And, of course, the war in Ukraine has added to the upward pressure on gasoline prices and grocery prices. There's not a lot the Fed can do about those supply shocks, but Powell did stress today that the central bank is determined now to address inflation from the demand side.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: I think you can see from the moves we're making now that we do understand the full scope of the problem. We must, must restore price stability. And we will. We have the tools and the resolve and hopefully the judgment to accomplish that task.

HORSLEY: And the Fed's primary tool for fighting inflation is raising interest rates to tamp down demand. That makes it more expensive for anyone to carry a credit card balance or get a car loan or a new home mortgage.

CHANG: Right. So answer me this. If borrowing money gets more expensive and if people buy less as a result of that, would that mean a slowdown for the broader economy?

HORSLEY: Well, that's the rub. Ideally, the Fed wants to cool off demand just enough to bring down inflation, but not so much that businesses start laying workers off. Democratic Senator Elizabeth Warren worries that in its zeal to control inflation, the central bank might go too far and tip the economy into recession.

(SOUNDBITE OF ARCHIVED RECORDING)

ELIZABETH WARREN: 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. And I hope you'll reconsider that before you drive this economy off a cliff.

HORSLEY: Powell says the Fed is not trying to provoke a recession, but he did concede it's a possibility. And a growing number of economists now think a recession is likely sometime in the next 12 months. Powell says a bigger risk, though, would be not acting and letting high inflation become entrenched. And for the moment at least, most politicians seem to agree. They're giving the Fed plenty of room as it tries to get prices under control.

CHANG: That is NPR's Scott Horsley. Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.