Washington (AFP) – Federal Reserve Chairman Jerome Powell has won praise for his shrewd leadership during the downward spiral of a pandemic recession. With threats to the US economy mounting, though, Powell increasingly shocked Fed watchers as being far less confident.
Inflation proved to be higher and more stable What he or the Fed’s economists expected. At a policy meeting last week, Powell announced an unusual last-minute turn to an even larger rate hike From what he indicated earlier – and then followed up with a press conference that many economists described as muddled and inconsistent.
It was a sharp turnaround for Powell, who is widely credited with preventing what could have been a much worse economic crisis during the pandemic and who last month won easy bipartisan confirmation in the Senate. For four years again.
Now, while facing chronically high inflation, it is flooding financial markets and the growing threat of a recessionPowell faces questions – and criticisms – surrounding his leadership of the Federal Reserve at a time when his challenges are multiplying.
With a once-in-a-century pandemic, the first major European war in decades, and soaring gas and food prices that the Fed had limited power to influence, Powell could become the first Fed chair since Paul Volcker in the early 1980s. wrestling with ‘stagflation’, A miserable combination of slow economic growth and high inflation.
Struggling to curb the worst outbreak of inflation in four decades, Powell last week engineered a three-quarter-point increase. In the Federal Reserve’s short-term interest rate – the single largest rate hike in a quarter century. It was an unexpectedly aggressive move after Powell made it clear a month ago that a more modest half-pip rate hike is coming.
In his press conference, Powell defended the Fed’s decision by noting that recent inflation readings were more worrying than expected. An increase in the Federal Reserve will make borrowing more expensive for many consumers and businesses.
However, Powell’s explanation has been criticized by many Fed watchers, with some complaining that he failed to formulate coherent and consistent policy.
“The Fed has been on the loose, rushing to catch up with painfully higher inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “The Fed doesn’t have a script and it kind of made it like it’s here.”
William Dudley, as the former head of the New York Fed, who worked with Powell on the Fed’s Board of Governors, said in a webcast last week that the central bank chief was putting his own credibility at risk.
“When the Fed changes its mind at the last minute like this,” Dudley said, “it has the potential to undermine the credibility” of its critical communications with markets and the public.
With those criticisms echoing, Powell will visit Capitol Hill this week to give his semi-annual testimony before House and Senate committees, where he may face tougher questions than at any other time in his Fed presidency. He will testify one year after asserting his confidence to Congress that inflation is temporary and likely to “wand.”
What were. In May, the government reported that consumer prices accelerated 8.6% from the previous year. At his press conference last week, Powell said the Fed was surprised by the recent numbers, fueled by the Russian invasion of Ukraine, still-clogged global supply chains, labor shortages and a growing demand for services from rents to airline tickets to restaurants. meals.
“We’re not seeing progress and we want to see progress and that’s really another part of why we’re doing what we did today,” Powell said on Wednesday.
The Fed’s massive interest rate hike and Powell’s comments have renewed concerns among economists about where the Fed has taken. Most analysts have criticized the Fed for taking too long to tighten credit When inflation took off last year they warned that they now have to raise interest rates too quickly to risk tipping the economy into recession.
“Our worst fears about the Fed have been confirmed,” Ethan Harris, head of global economics at Bank of America, said in a note to clients last week. “They’ve fallen a lot behind the curve and are now playing a dangerous game to catch up.”
Of a related concern, Powell said the Fed will continue to raise rates until there is “clear and convincing” evidence that inflation is falling back toward its 2% annual target. But raising interest rates usually takes months to slow the economy. The Fed could end up raising interest rates more than needed before it realizes that inflation is falling, thus increasing the possibility of a recession.
“It’s very likely that the landing will be violent,” Dudley said. “The risk of a hard landing has risen.”
Last week, Powell expressed some optimism about the economy’s sustainability, although his confidence was more fainter than in previous months. He continued to hold out hope that the Fed could make a “soft landing,” meaning growth would be slow enough to tame inflation without causing an economic downturn and massive job losses.
Dudley suggested that Powell should do more to prepare the public for the possibility of real economic pain.
Last week, Fed policymakers updated their economic forecasts to show, for the first time since they began raising interest rates in mid-March, that they expect unemployment to rise and the economy to weaken over the next two years. However, the expected increases were small, with unemployment rising to 3.9% by the end of 2023, just three-tenths of a point above its current level.
Many outside economists are more pessimistic, which raises the question of whether the Fed’s Powell is still downplaying the amount of damage the economy may absorb.
“They went from terribly unrealistic to marginally reasonable in their expectations,” Dudley said.
Other economists note what appears to be a central contradiction in Powell’s comments: He said the Fed is raising interest rates faster and is likely to reach a higher level than he expected just three months ago because gas and food prices, the most visible signs of inflation, remain high.
However, Krishna Guha, an economist at investment bank Evercore ISI, said “Powell publicly acknowledges that the Fed has no control over” those supply shocks. “Aspects of the press conference… don’t seem entirely coherent or wise.”
Powell can take some solace from the fact that other central banks around the world also appear to be struggling to control inflation. On the same day the Federal Reserve raised its key interest rate by three-quarters of a point, the Swiss National Bank announced a surprise half-point increase.the first rise of any size in 15 years.
The Bank of England has faced criticism to raise its key rate by a quarter of a point for five consecutive meetings, a pace that some observers still consider too slow to counteract inflation that could hit 11% this fall. The Reserve Bank of Australia has raised its benchmark interest rate twice in the past five weeksafter leaving it at nearly zero for 11 years.
Some economists speculate that by announcing his surprise big rate hike last week, Powell aimed to confound expectations by showing increased resolve on the part of the Federal Reserve, even to the point of risking a recession if needed to defeat a rising recession.
“They risk going overboard, but I suspect it’s a deliberate risk, given the priority they have on lowering inflation,” said Donald Kohn, a former vice chair of the Federal Reserve and now a senior fellow at the Brookings Institution. .
At the same time, most Fed watchers admit that Powell’s tenure has been extraordinarily difficult, starting with the persistent public attacks from former President Donald Trump – who appointed him Fed chair – and then the pandemic recession and high inflation exacerbated by Russia’s invasion of Ukraine.
“In the past year, everything seems to have gone well,” said Douglas Porter, chief economist at BMO Financial Group. “I think we are actually expecting a little bit of good luck. There is still a way for the economy to get through this without a full recession.”