Federal Reserve Chairman Jerome Powell said there was no guarantee the central bank could tame runaway inflation without hurting the labor market.
Speaking at a European Central Bank forum in Sintra, Portugal, on Wednesday, Powell reiterated his hope that the Fed could achieve a so-called soft landing by raising interest rates just enough to slow the economy. economy and curb the rise in consumer prices without causing a recession and sharply increasing the unemployment rate.
We believe we can do it. That’s our goal,” he said. But the Russian invasion of Ukraine, he said, made the task more difficult by disrupting trade and driving up the price of food, energy and chemicals.
It got harder,’ Powell said. The tracks have become narrower.”
ECB President Christine Lagarde echoed the major impact “of energy shocks, which reverberate around the world but are acutely felt in Europe due to its dependence on Russian oil and natural gas. She also pointed to Europe’s closeness to the war in Ukraine and said how energy was “grossly undervalued” in the bank’s inflation assessment.
The ECB and the Fed have been slow to recognize the inflationary threat that appeared just over a year ago. They believed the price hike was the temporary result of supply chain issues as the economy rebounded with unexpected speed from the brief but devastating coronavirus recession of 2020.
But inflation continued to accelerate. The Fed raised its benchmark short-term rate in March and May and appeared poised for another half-percentage-point hike at its June 14-15 meeting.
Then the Labor Department reported that consumer prices rose 8.6% in May from the biggest rise in the previous year since 1981. The Fed responded by raising the rate by three-quarters of percentage point, the largest increase since 1994.
The European Central Bank is backing the Fed, but said it would raise rates in July for the first time in 11 years and again in September to target record inflation of 8.1% in the 19 countries using the euro. In a speech opening the ECB forum on Tuesday, Lagarde said the bank will gradually hike but will keep its options open to stamp out inflation if it rises faster than expected.
Increasingly, economists fear that higher rates could push the economy into a recession.
Powell, however, pointed to high unemployment in the job market for nearly half a century at 3.6% and noted that most households and businesses have healthy savings.
Overall,” he said, the US economy is well positioned to withstand tighter monetary policy.
Lagarde noted that the same is true for Europe.
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