WASHINGTON • The Federal Reserve's commitment to reining in 40-year-high inflation is "unconditional" but also comes with the risk of higher unemployment, United States central bank chief Jerome Powell said yesterday.
"It's unconditional," he told the US House of Representatives Financial Services Committee when asked about the Fed's commitment to fight inflation.
By the central bank's preferred measure, inflation is running at more than three times its 2 per cent target. He was testifying in the second of two days of congressional hearings.
Mr Powell on Wednesday had given his most explicit acknowledgement to date that steep interest rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing "very challenging".
"The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy," he told the Senate Banking Committee on Wednesday.
"We can't fail on that task. We have to get back to 2 per cent inflation."
The Federal Open Market Committee last week raised its benchmark lending rate 75 basis points - the biggest increase since 1994 - to a range of 1.5 per cent to 1.75 per cent.
Mr Powell told reporters after the Wednesday testimony that another 75 basis point increase, or a 50 basis point move, was on the table next month.
At yesterday's meeting, he said: "We really need to restore price stability... because without that we're not going to be able to have a sustained period of maximum employment where the benefits are spread very widely."
"It's something that we need to do, we must do," he added.
He was grilled on both days by lawmakers in Congress over the Fed's effort to control inflation, which is lifting fears of a sharp economic slowdown or recession and a steep rise in unemployment.
On Wednesday, Mr Powell told the banking committee that the Fed was not trying to provoke a recession but that one was "certainly a possibility" with recent global events outside its control making it more difficult to tame price pressures without inducing a downturn.
Under questioning by members of the House panel yesterday, he said there was a risk the Fed's actions could lead to a rise in unemployment. The US jobless rate stood at 3.6 per cent in May.
"We don't have precision tools," he said, "so there is a risk that unemployment would move up, from what is historically a low level though. A labour market with 4.1 per cent or 4.3 per cent unemployment is still a very strong labour market."
At the same time, however, Mr Powell said he expects economic growth to pick up in the second half of the year after a sluggish start to 2022.
Price pressures have continued to build for months, forcing the Fed to ramp up its tightening of financial conditions in an attempt to cool demand while hoping that some supply chain issues begin to untangle over the next few months.
Economists polled by Reuters earlier this week forecast the Fed would deliver another 75 basis point rate hike in July, followed by a half percentage point rise in September, with no scaling back to quarter percentage point moves until November at the earliest.
There are already some tentative signs of softening of a still red-hot labour market, with claims for unemployment benefits treading water since tumbling to more than a 53-year low in March.