Federal Reserve Chairman Jerome Powell said it is going to be “very challenging” for the central bank to rein in inflation without triggering a recession.
Powell acknowledged during a Thursday International Monetary Fund panel that the Fed will likely have to act more aggressively than initially thought to depress the country’s soaring inflation. Consumer prices increased 8.5% in the 12 months ending in March, a faster rate of inflation at any time since December 1981.
“Our goal is to use our tools to get demand and supply back in sync so that inflation moves down and does so without a slowdown that amounts to a recession,” Powell said. “I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy. It’s going to be very challenging. We’re going to do our best to accomplish that.”
To stave off the rising prices, the Fed must hike interest rates to slow spending. Some economists fear that the Fed is so far behind on raising rates that because it will have to be more sudden and aggressive with the hikes, it will knock the economy into a recession.
RECESSION RISK RISING AND ADDING TO INFLATION PROBLEMS
While at the IMF panel on Thursday, Powell reiterated that the Fed might decide to raise its interest rate target by a half percentage point as opposed to the typical quarter-point bump. Doing so would be akin to two simultaneous rate hikes, and such an aggressive tack hasn’t been taken by the central bank in more than two decades.
Powell, a Republican who was renominated for his position by President Joe Biden last year, said that with surging inflation, “it is appropriate, in my view, to be moving a little more quickly” to raise interest rates.
“I also think there is something to be said for front-end loading any accommodation one thinks is appropriate. … I would say 50 basis points will be on the table for the May meeting,” the chairman said on Thursday.
Most investors now foresee a half-point hike in May, with the likelihood of the more aggressive rate hike occurring pegged at nearly 100%, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices. A majority of investors are also predicting two more half-point hikes in June and July, a much more intense pace than thought just weeks ago.
There have been some signs of a possible recession flashing red in the bond market.
The yield on the five-year Treasury note is now at 2.98%, higher than the yield on 30-year notes, which are at 2.93%. When the yield on the shorter note is higher than the longer note, it signals an “inversion.”
Yield curve inversions can portend recessions as they show investors have little faith in the ability for growth to pick up in the coming years. Desmond Lachman, a senior fellow at the American Enterprise Institute, noted that every time yield curves have inverted, a recession has followed within six months to two years later.
“The bond market is a lot more accurate than the stock market at these things,” he recently told the Washington Examiner, pegging the odds of a coming recession at greater than 50%.
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In the Wall Street Journal’s regular survey of economists, an increasing number foresee the Fed being unable to nail a “soft landing,” which is tamping down inflation without sending the U.S. economy into a recession. Nearly 30% of those surveyed now predict a recession within the next year.
The next meeting of the Federal Open Market Committee, which determines the central bank’s interest rate target, is set for May 3-4.
