Powell says there’s ‘no guarantee’ the Fed can spare jobs while taming inflation
Federal Reserve Chair Jerome H. Powell said there’s “no guarantee″ the central bank can tame runaway inflation without hurting the job market.
Speaking Wednesday at a European Central Bank forum in Sintra, Portugal, Powell repeated his hope that the Fed can achieve a so-called soft landing — raising interest rates just enough to slow the economy and rein in surging consumer prices without causing a recession and sharply raising the unemployment rate.
“We believe we can do that. That is our aim,″ he said. But the Russian invasion of Ukraine, he said, had made the job more difficult by disrupting commerce and driving up the price of food, energy and chemicals.
“It’s gotten harder,” Powell said. “The pathways have gotten narrower.″
Taking steps to quell inflation by rolling back employment would cause unnecessary hardship for millions, with little gain to show for it.
European Central Bank President Christine Lagarde echoed the “major impact” of energy shocks, which are rippling worldwide but felt acutely in Europe because of its reliance on Russian oil and natural gas. She also pointed to Europe’s proximity to the war in Ukraine and said “energy was vastly underestimated” in the bank’s assessment of inflation.
The European and U.S. central banks were slow to recognize the inflation threat that emerged just over a year ago. They believed that rising prices were the temporary result of supply chain snags as the economy bounced back with unexpected speed from 2020′s brief but devastating coronavirus recession.
But inflation kept accelerating. The Fed raised its short-term benchmark rate in March and May and appeared to be ready for another half-percentage-point increase at its meeting June 14 and 15.
Then, the Labor Department reported that consumer prices had shot up 8.6% in May from a year earlier — the biggest jump since 1981. The Fed responded by pushing the rate up by three-quarters of a percentage point — the biggest increase since 1994.
Europe’s central bank is behind the Fed but said it will raise rates in July for the first time in 11 years and again in September to target inflation running at a record 8.1% in the 19 countries using the euro. In a speech Tuesday opening the forum, Lagarde said the central bank would go gradually with increases but keep its options open to “stamp out” inflation if it surges faster than expected.
Increasingly, economists worry that higher rates could push the economy into a recession.
Powell, however, pointed to a strong labor market — unemployment is near a half-century low at 3.6% — and noted that most households and businesses had healthy savings.
“Overall,” he said, “the U.S. economy is well positioned to withstand tighter monetary policy.”
Lagarde said the same was true of Europe.