Jun 22, 2022 - Economy

Fed chair says recession a "possibility" amid inflation battle

Jerome Powell speaks during a Senate Banking, Housing and Urban Affairs Committee hearing on June 22. Photo: Ting Shen/Bloomberg via Getty Images

Federal Reserve chair Jerome Powell told lawmakers on Wednesday that a U.S. recession is a "possibility" as it plots an aggressive interest rate hike campaign to contain prices that are rising at their fastest clip in over 40 years.

Why it matters: Fears of a recession have grown among some market watchers and economists as the Fed signaled it will be more aggressive in slowing down the economy in an effort to get inflation under control.

What he's saying: To be clear, Powell said he did not see the odds of a recession as elevated at the moment. He acknowledged it was "certainly a possibility" but not something the Fed was trying to "provoke."

  • "It is not our intended outcome at all," Powell said.
  • Echoing comments he made last week after announcing the steepest rate hike since 1994, Powell said a soft landing "has been made significantly more challenging by the events of the last few months," referring to Russia's invasion of Ukraine, spiking commodity prices and supply chain challenges.

Between the lines: Senators from both parties are skeptical that the Federal Reserve's policies can quell food and gas inflation. That was a recurring theme as Powell began two days of congressional testimony on monetary policy.

  • The hearings this week will hint at the type of pressure Powell faces from lawmakers, as their constituents grapple with nosebleed prices and growing recession risks.

Here are two exchanges that illustrate the angst about the Fed's role in the inflation fight:

  • Sen. Elizabeth Warren (D-Mass.): "Inflation is like an illness, and medicine needs to be tailored to the specific problem. Otherwise, you could make things a lot worse. Right now, the Fed has no control over the main drivers of rising prices."
  • Sen. Mike Rounds (R-S.D.): "The portion of inflation which Americans are feeling today may not just be the core inflation that some of your tools address."

Between the lines: Democrats quizzed Powell about whether the Fed's moves to quell inflation could tip the economy into a recession.

What to watch: Some Republicans piled on to Powell, calling out the Fed for being too slow to react to inflation pressures.

  • "Though I'm pleased you have begun taking drastic action necessary to right the U.S. economy, these actions are long overdue, and monetary policy remains too loose," North Carolina Sen. Thom Tillis said.
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