Jay Powell struggled to allay fears of an impending recession, although he warned more inflation surprises could be on the way.
In a testimony before the Senate Banking Committee on Wednesday, the Federal Reserve Chairman said the economy could handle significantly tighter monetary policy as he stressed the central bank’s commitment to stamping out the highest inflation in four decades.
But fears of a possible recession have intensified in recent weeks as inflation data came out worse than expected.
“The American economy is very strong and well positioned to deal with tighter monetary policy,” Powell said in prepared remarks, highlighting the resilience of the US consumer and labor market, where employment has grown by an average of about 400k a month is.
However, he emphasized the uncertainty affecting the outlook and went beyond previous comments, acknowledging that the path to a “soft landing” has become more difficult.
“Inflation has obviously surprised on the upside over the past year and more surprises may be in store,” he warned.
“We therefore need to respond quickly to incoming data and the evolving outlook, and we will endeavor not to add additional uncertainty at an already extraordinarily challenging and uncertain time.”
The central bank last week carried out the biggest interest rate hike since 1994, lifted the federal funds rate to a new target range of 1.50 to 1.75 percent and signaled its support for what is likely to be the most aggressive monetary tightening campaign since the 1980s.
Powell’s testimony comes at a critical time for the White House as it tries to manage rising expectations of a sharp slowdown in growth ahead of November’s midterm elections. Many economists have since hinted at a recession by next year.
“A recession is not inevitable,” US President Joe Biden told reporters this week — a message also sent by Janet Yellen, the US Treasury Secretary, and Brian Deese, the director of the National Economic Council.
Fed officials have started preparing market participants for another rate hike of at least 0.75 percentage point at their next meeting in July, on the expectation that the central bank’s threshold to see “convincing evidence” that inflation is easing fruit will not be reached.
Powell said future decisions on Fed policy actions would be decided “meeting-by-meeting,” dependent on “incoming data and the evolving outlook for the economy.”