Federal Reserve Chair Jerome Powell said Wednesday he expects the U.S. economy to slow under the weight of the central bank’s interest rate hikes to a point that could cause job losses.
Speaking after the Fed issued another rate hike, Powell said the U.S. may be able to avert a full-blown recession but could not avoid hardship as the bank ramps up its fight against inflation.
“If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that — there isn’t,” Powell said.
“We certainly haven’t given up the idea that we can have a relatively modest increase in unemployment. Nonetheless, we need to complete this task.”
Powell addressed reporters after the Fed announced it would increase its baseline interest rate range by 0.75 percentage points, the fifth rate hike this year and third 75 basis point hike in three consecutive monetary policy meetings.
Fed officials also projected another 1.25 percentage points of rate hikes before the end of the year, which Powell said would push borrowing costs into a level meant to restrict the economy.
The Fed is attempting to bring inflation back down toward its annual target of 2 percent by slowing the economy and reducing the amount of money spent on goods and services. The bank does so by raising borrowing costs throughout the economy, which gives consumers less flexibility to spend and businesses less room to hire and expand.
The Fed had hoped it could raise rates slowly and steadily enough to curb inflation without causing a sharp decline in the economy. While the housing market and stock values have been hit hard by higher rates, the U.S. has added more than 2 million jobs this year and employers are still struggling to find enough workers to fill a record number of open gigs.
But Powell acknowledged Wednesday it would be impossible to bring inflation down without slowing the economy enough to cause pain for many households.
“No one knows whether this process will lead to a recession, or if so, how significant that recession would be. That’s going to depend on how quickly wage and price inflation pressures come down,” Powell said.
Fed officials expect the jobless rate to hit 4.4 percent in 2023 after edging up to 3.8 percent by the end of this year after several more interest rate hikes to close out 2022, according to projections released Wednesday. They also expect to raise their baseline interest rate range to a span of 4.25 to 4.5 percent by the end of 2022 and keep rates close to that level through the end of 2023.
Powell said the Fed will continue to push interest rates deeper into a “restrictive” level meant to slow the economy until inflation is finally on track to reach the bank’s 2 percent target.
“We think that a failure to restore price stability would mean far greater pain later on,” Powell said, referring to the Fed’s bruising fight against inflation during the 1980s. He argued that Americans would suffer deeper economic hardship for much longer if the Fed allowed inflation to once more spiral uncontrollably higher.
“You can think of price stability as an asset that just delivers large benefits to society over a long period of time,” he said. “The record shows that if you postpone, that delay is only likely to lead to more pain.”