[Fed Mentioning Economic Downturn] Initially Said Soft Landing Possible... Powell Admits "There Is a Possibility"

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Jerome Powell, chairman of the U.S. central bank, the Federal Reserve (Fed), officially acknowledged on the 22nd (local time) that there is a possibility of an economic recession due to the impact of interest rate hikes. This marks a clear shift in tone from just a few days ago, when he emphasized achieving a so-called ‘soft landing’ that lowers inflation without cooling the economy. His stance also somewhat differs from that of the Joe Biden administration.

Chairman Powell appeared before the Senate Banking Committee and was asked whether he sees the Fed’s interest rate hikes leading to an economic downturn. He responded, "It is certainly a possibility."

He stated, "The U.S. economy is very strong and capable of withstanding intense monetary tightening," but also admitted, "While it is not the intended outcome, the possibility (of a recession) certainly exists." He further noted, "The Fed’s monetary policy may not affect certain energy and food prices," and assessed that "a soft landing is a very challenging task."

These remarks came amid a flood of reports from Wall Street investment banks indicating an increased probability of recession. Although he added that the probability is not high, the fact that the head of U.S. monetary policy publicly acknowledged the possibility carries significant weight in the market. Citigroup raised the global recession probability to 50% on the same day. Christian Sewing, CEO of Deutsche Bank AG, also stated, "The possibility of a global recession is as high as 50%."

Powell’s comments contrast with the positions of President Biden and his cabinet. President Biden, Treasury Secretary Janet Yellen, and others have dismissed recent recession concerns by saying, "It is not inevitable."

On the same day, Powell also confessed that it is becoming increasingly difficult to simultaneously achieve the Fed’s two goals of a strong labor market and price stability. He reaffirmed the Fed’s aggressive tightening policy by saying, "We are strongly committed to bringing down inflation," and "We will continue raising interest rates until we see clear evidence that inflation is slowing toward the Fed’s 2% target." The Fed recently implemented a ‘giant step’ by raising rates by 0.75 percentage points for the first time in 28 years and has signaled another increase of 0.5 or 0.75 percentage points in July.

Meanwhile, the New York stock market closed lower across the board as risk asset appetite deteriorated following Powell’s remarks. Prices of safe-haven assets such as U.S. Treasury bonds and gold rose. West Texas Intermediate (WTI) crude oil fell 3.04% from the previous session to $106.19 per barrel, influenced by recession concerns and President Biden’s call for temporary suspension of the fuel tax.

This content was produced with the assistance of AI translation services.