The Federal Reserve’s efforts to tamp down on inflation may lead to an economic recession, Fed Chair Jerome Powell admitted Wednesday.
“Is there a risk that we would go too far [with rate hikes]? Certainly there’s a risk,” Powell said to a European Central Bank forum Wednesday. “The bigger mistake to make would be to fail to restore price stability.”
Still, the Fed chairman added that it’s possible to achieve a so-called “soft-landing,” where inflation is brought down to earth without hurting the jobs market or economic growth, but “the pathways have gotten narrower.”
“The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening,” said Powell.
The Federal Reserve has been fighting inflation since March, issuing a massive rate hike of 0.75% in June, but prices have continued to climb. One study found that the average Fourth of July cookout will be 17% more expensive than 2021.
The Fed has signaled that rates could rise even further, from the current aggregate rate of 1.75% to 3.4% by the end of 2022 and to perhaps as much as 4.0% by sometime next year.
Powell noted in May that “nothing about [the economy] suggests that it’s close to, or vulnerable to, a recession,” highlighting how Thursday’s comments stand in stark contrasts to earlier predictions on the direction of the economy.
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