US Recession: 'Steep rate hikes could tip US into recession'

Federal Reserve Chair Jerome Powell gave his most explicit acknowledgment to date that steep rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”

“The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers on Wednesday. “We can’t fail on that task. We have to get back to 2% inflation.”

The Fed Chair was testifying before the Senate Banking Committee during the first of two days of congressional hearings. In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate,” to cool the hottest price pressures in 40 years.

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he said.

Powell’s remarks reinforced comments at a press conference last week after he and his colleagues on the Federal Open Market Committee raised their benchmark lending rate 75 basis points – the biggest increase since 1994 – to a range of 1.5% to 1.75%.

While Powell told reporters then that another 75 basis-point increase, or a 50 basis-point move, was on the table for the next meeting in late July, Wednesday’s text made no reference to the size of future rate hikes. Fed Governor Christopher Waller said Saturday that he would support a 75-basis-point rate increase in July should economic data come in as he expects.

“We understand the hardship high inflation is causing,” Powell said Wednesday. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.”

Investors expect the US central bank to keep raising rates to a peak around 3.6% by the middle of next year, according to interest-rate futures.

“Financial conditions have tightened and priced in a string of rate increases and that’s appropriate,” Powell said in response to a question following his opening remarks. “We need to go ahead and have them.”

The Labor Department’s consumer price index rose 8.6% last month from a year earlier, a four-decade high. University of Michigan data showed US households expect inflation of 3.3% over the next five to 10 years, the most since 2008 and up from 3% in May.