US Recession: ‘Steep rate hikes could tip US into recession’

Federal Reserve chairman Jerome Powell gave his most explicit admission yet that steep rate hikes could send the US economy into recession, saying a recession is possible and calling a soft landing “very challenging.”

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

The Fed chairman testified before the Senate Banking Committee during the first of two days of congressional hearings. In his opening address, Powell said officials “anticipate continued rate hikes will be appropriate” to cool the biggest price pressures in 40 years.

“Inflation has clearly surprised positively over the past year and there may be more surprises ahead. We will therefore need to be agile in responding to incoming data and the evolving outlook,” he said.

Powell’s comments bolstered comments at a news conference last week after he and his Federal Open Market Committee colleagues raised their benchmark lending rate by 75 basis points — the largest increase since 1994 — to a range of 1.5% to 1. 75%.

While Powell then told reporters that a 75 basis point hike or a 50 basis point move was still on the table for the next meeting at the end of July, Wednesday’s text made no reference to the magnitude of future rate hikes. Fed Governor Christopher Waller said on Saturday he would support a 75 basis point rate hike in July if economic data comes in as he expects.

“We understand the difficulties caused by high inflation,” Powell said Wednesday. “We are determined to bring inflation back and we are moving fast to do so.”

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

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

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

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