Fed Chair Jerome Powell Admits Possibility of Recession Due to Rate Hikes

The head of the US central bank has acknowledged the possibility of recession as a result of its ongoing round of interest rate hikes, evincing the authority’s commitment to taming breakneck inflation. 

On Wednesday Federal Reserve chair Jerome Powell told the US Senate Banking Committee that achieving a soft landing for the US economy would be “very challenging”. 

“It’s not our intended outcome at all, but it’s certainly a possibility,” said Powell, with reference to an economic recession caused by rate hikes.  

“Frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2 per cent inflation and still a strong labour market.” 

Powell told the Senate that the Fed is “strongly committed” to containing breakneck inflation that has recently risen to a four-decade high.  

He said that the Fed’s hawkish measures will continue until there is at least “compelling evidence that inflation is moving down.” 

“We have both the tools we need and the resolve it will take to restore price stability,” Powell said.  

Powell’s remarks weighed upon a range of asset classes on Wednesday, heightening investor concerns about the possibility of a global recession.  

Brent Crude futures dropped 4.3% to USD$109.75, for its lowest level in a month. The S&P 500 edged lower 0.13%, while the Dow Jones Industrial Average and the Nasdaq Composite both slipped 0.15%. 

Gold received some support from its traditional status as a safe haven refuge during economic downturns. Spot prices for the metal rose 0.3% to $1,837.53 per ounce.  

The Fed’s commitment to hawkish monetary policy, as demonstrated by its apparent willingness to risk a recession in order to contain inflation, is likely to keep the US dollar buoyant, given the comparatively dovish tenor of the world’s other major central banks.  

The Fed has already raised its target interest rate by a total of 1.5 percentage points since the start of the year. In June it pushed through a 0.75 percentage point hike, for the largest increase since 1994.  

This followed a 0.25 percentage point hike in April, and a 0.5 percentage point increase in May.  

In comparison to the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) have remained dovish to say the least.  

ECB President Christine Lagarde has flagged the authority’s intention to raise interest points by just 0.25 percentage points in July, with the possibility of another increase in September.  

These comparatively tepid measures arrive despite the Euro zone also facing surging inflation since the start of the year. Europe’s inflation challenges could also rapidly worsen, given the sanctions imposed by Western nations upon key energy supplier Russia in response to the war in Ukraine.  

On the other side of the eurasian continent, Japan remains largely free of the raging inflation that has roiled Europe and the US, while economic policymakers appear little concerned about depreciation of the Japanese yen.  

BOJ governor Kuroda has instead sought to maintain the long-term yield target of 0.25%, launching a mammoth government bond buying program last week worth around 10.9 trillion yen (around USD$81 billion).  

If the Fed’s interest rate hikes continue to greatly outpace those made by ECB and BOJ, this will mean that dollar-denominated assets will produce yields that are increasingly higher than those in the euro or the yen. The differential in returns is set to give further support to the greenback for some time to come.