Powell Says Fed Can Avert Recession But Task Getting Tougher

(Bloomberg) — Federal Reserve Chair Jerome Powell said the US economy is in “strong shape” and the central bank can reduce inflation to 2% while maintaining a solid labor market, even though that task has become more challenging in recent months.

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He also vowed to ensure rapid price increases don’t become entrenched, saying that “we will not allow a transition from a low inflation environment to a high inflation environment.”

“We hope that growth will remain positive,” Powell said Wednesday during a panel discussion at the European Central Bank’s annual policy forum in Sintra, Portugal. Household and business finances are also in solid shape, and “overall the US economy is well positioned to withstand tighter monetary policy.”

Read Bloomberg’s TOPLive blog on the ECB conference panel

Raising interest rates without sparking a recession “is our aim and we believe there are pathways to achieve that,” Powell said, reiterating comments he’s made this month. The Fed on June 15 raised interest rates by 75 basis points, the biggest increase in three decades. Powell has signaled that another move of that size — or a 50 basis-point increase — will be on the table when they meet again in late July.

He reiterated Wednesday that the Fed is raising rates “expeditiously” and aims to move “into restrictive territory fairly quickly,” referring to having borrowing costs at levels that would restrain rather than spur economic growth.

Powell and his colleagues have pivoted aggressively to fight the hottest inflation in 40 years amid criticism that they left monetary policy too easy for too long as the economy recovered from Covid-19. They’ve raised rates by 1.5 percentage points this year and officials forecast about 1.75 points of further cumulative tightening in 2022.

Powell said financial markets’ pricing for Fed rate-hike expectations is “pretty well aligned with where we’re going,” noting that it’s roughly in line with the forecasts that Fed policy makers issued earlier this month.

Asked by panel moderator Francine Lacqua of Bloomberg Television if he’s concerned about the yield curve — whose partial inversion is seen by some as a possible recession signal — Powell said it’s “not a top-line worry right now” and that the Fed is focused on bringing down inflation.

The shift to higher rates has rocked financial markets as investors fret the Fed could trigger a recession. About a third of economists predict a US recession as likely in the next two years, 21% seeing some time with zero or negative growth likely and the rest looking for the Fed to achieve a soft landing of continuing growth and low inflation, according to a survey earlier this month.

Powell spoke on a panel with ECB President Christine Lagarde and Bank of England Governor Andrew Bailey. All three central bankers are trying to lower inflation, which has become a global problem exacerbated by supply-chain disruptions associated with the Covid-19 pandemic as well as surging food and energy prices in the wake of Russia’s invasion of Ukraine.

Regime Change

More broadly on Wednesday, the panelists questioned whether their economies would return to the environment of persistently low inflation that they observed prior to the pandemic.

Lagarde said she doesn’t think “that we are going to go back to that environment of low inflation.” She added that Russia’s invasion of Ukraine is also “going to change the picture and the landscape within which we operate.”

Powell said the economy now is “quite different” than before the pandemic, “with higher inflation and many supply shocks and strong inflationary forces around the world.”

Surging prices have infuriated Americans and harmed the standing of President Joe Biden’s Democrats with voters ahead of November congressional elections.

Consumer prices rose 8.6% in May from a year ago, according to the Labor Department. June CPI data will be published July 13, two weeks before the Fed meets. The central bank targets a separate gauge from the Commerce Department, which is released with a lag and was running more than three times faster than the Fed’s 2% goal, according to its latest reading.

In his press conference following the Fed’s last meeting, Powell cited the preliminary University of Michigan survey of inflation expectations as among the factors prompting policy markets to raise rates by 75 basis points in a late shift. The preliminary reading showed Americans expecting 3.3% inflation over the next five to 10 years, but that was revised down to 3.1% in the final report.

(Adds comments from Lagarde on inflation.)