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Fed’s Jay Powell faces test of ‘unconditional’ resolve to tame inflation

When the Federal Reserve released its semi-annual report on monetary policy to Congress last Friday, one word stood out in the 70-page document.

The Fed’s commitment to restore price stability was “unconditional,” policymakers wrote in their most emphatic pledge yet to address the most acute inflation problem in about 40 years.

While that promise cleared up any doubts about the Fed’s overarching priorities, it also suggested that some of the historic economic recovery since the depths of the pandemic may now have to be sacrificed to achieve that goal.

Fed Chair Jay Powell will face these questions on Wednesday, as he faces U.S. lawmakers ahead of the first of two congressional hearings on the state of the economy and how the Fed is fulfilling its dual mandate of stable prices and maximum employment. tries to achieve.

His testimony comes at a turning point not only for the Federal Reserve — which last week dramatically stepped up its efforts to contain rising prices by enacting its biggest rate hike since 1994 — but also for the White House, which is trying to lower expectations a slowdown in growth and the labor market towards the midterm elections in November and beyond.

“There is nothing inevitable about a recession,” US President Joe Biden told reporters this week, echoing the language of Janet Yellen, the US Treasury Secretary, and Brian Deese, the director of the National Economic Council.

Biden’s comments followed a conversation with former Treasury Secretary Larry Summers, who last year criticized the president’s stimulus plan and the Fed’s policy of fueling inflation, and is now issuing alarm signals about the economic crisis. pain needed to successfully combat the high prices.

“We need five years of unemployment above 5 percent to contain inflation — in other words, we need two years of unemployment at 7.5 percent, or five years at 6 percent unemployment, or one year at 10 percent. unemployment,” Summers warned. on Monday. “There are numbers that are remarkably discouraging relative to the [Fed] vision.”

Compared to the March forecast, which many economists have labeled “wishful thinking,” the latest individual projections released by the Fed last week more explicitly acknowledged that an economic slowdown will be needed to drive down inflation. But more importantly, they stopped suggesting that efforts to cool the economy will lead to a recession.

Most officials now predict that the key rate will peak at around 3.75 percent by the end of next year, with core inflation slowing from its annual pace of 4.9 percent in April to 2.7 percent in 2023. The unemployment rate is still expected to rise just 0.03 percentage point at that point to 3.9 percent, before reaching 4.1 percent in 2024.

That’s a step up from the 3.6 percent forecast three months ago, but still a conservative estimate, economists warn.

†[The Fed] We have a daunting task ahead of us,” said Karen Dynan, an economics professor at Harvard University who previously worked at the central bank. “The experience of the past year really raises the question of whether such a large retreat [in inflation] is realistic without more pain.”

Powell has only gone so far as to admit that the path to a so-called soft landing has become more challenging, especially as outside forces — such as the surge in commodity prices resulting from the Russian invasion of Ukraine and long-term supply chain disruptions associated with Covid -19 lockdowns — have exacerbated inflationary pressures.

“What is becoming increasingly clear is that many factors beyond our control will play a very important role in deciding whether that is possible or not,” he said at a news conference last week, stressing that until there is “conclusive evidence”. is. With inflation coming under control, the central bank would continue its aggressive approach to raising interest rates.

Fed officials have begun laying the groundwork for another 0.75 percentage point rate hike at their next meeting in July, with market participants gearing up for even further tightening. This is based on the expectation that inflation data will not improve in the coming months at a pace that warrants any easing by the central bank.

According to estimates released Friday by the Fed, which are based purely on theoretical policies that the central bank uses as signposts but not “mechanically” follow, interest rates should be in the range of 4 to 7 percent against the current economic backdrop.

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