Inflation remains more than double the Federal Reserve’s target, the financial sector is reeling from a trio of bank collapses and economists’ calls for an impending downturn are growing stronger by the day. But for Fed Chairman Jerome Powell, the chances of the central bank defying history and slowing inflation without crashing the economy remain not only possible, but likely — and the Fed’s work may be almost done.
“I continue to think it’s possible that this time is really different,” Powell told reporters Wednesday after the Fed moved to raise interest rates for the 10th straight time this tightening cycle, to just above 5%. “Avoiding a recession is, in my view, more likely than having a recession.”
Powell’s view of the way forward for the US economy provided a jolt of optimism after a series of recent economic and financial hiccups that have spooked investors and rekindled recession fears. In remarks to reporters, he argued that the remarkably resilient labor market could be strong enough to stave off an economic downturn and that wages could slow back to a more typical pace as demand for workers falls, even if unemployment never rises significantly.
The fact that the unemployment rate has remained near record lows despite 5 percentage points of rate hikes since last March has raised the possibility, he suggested, that the labor market could continue to gradually cool without widespread layoffs.
Powell also emphasized that the banking system is healthy and that the Fed will work to ensure that the banking crises seen in recent weeks will not happen again. And he suggested that because of the way the economy has reacted to both the Fed’s rate hikes and the tightening of credit conditions due to the banking sector fallout, the central bank may have just raised the federal-funds rate for the last time this cycle.
“There is a sense that we are much closer to the end of this than the beginning,” Powell said.
To be sure, the outlook was not entirely rosy. The Fed chairman left the door open to further tightening if incoming economic data suggests another rate hike, while acknowledging that his no-recession forecast would be “against history” and that a downturn cannot be ruled out.
Still, his comments overall came across as remarkably upbeat on the path forward for the central bank as it moves into a more delicate phase of the tightening cycle and tries to move toward an elusive finish line. Federal Open Market Committee officials were unanimous in their decision to raise interest rates again, suggesting that each member saw the economy as strong enough to withstand further tightening.
Powell was careful not to tie the Fed’s hands on what comes next. His repeated emphasis on taking a “data-driven” approach means the central bank has abandoned the idea, at least for now, of giving investors explicit forward guidance on what to expect when the FOMC meets again in late June.
But the focus on ongoing economic strength and resilience suggests the Fed’s bias continues to move forward to tighten policy even if it means some economic fallout, given that inflation remains the central bank’s primary target. Despite recent banking instability, the Fed continues to be more concerned about not doing enough to get inflation under control than it is about tightening too much.
The committee “retains a hawkish policy of not encouraging financial market participants to get ahead of themselves on rate cut expectations and undue easing of financial conditions,” wrote Richard de Chazal, a macro analyst at William Blair. “The Fed feels they are leaving their options open.”
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