“Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control,” Powell said in an interview with the Marketplace publication on Thursday. "I will also say that the process of getting inflation down to 2% will also include some pain."
After contracting 3.5% in 2020 from disruptions forced by the coronavirus pandemic measures, the US economy expanded by 5.7% in 2021, growing at the fastest pace since 1982.
But inflation has grown just as fast as the economy and faster. The Personal Consumption Expenditure Index, an inflation indicator closely followed by the Federal Reserve, rose by 5.8% in the year to December and 6.6% in the 12 months to March. Both readings reflected the fastest growth since the 1980s. The Consumer Price Index and the Producer Price Index, two other key gauges for inflation, rose 8.3% and 11%, respectively, in the year to April.
The central bank's own tolerance for inflation is 2% per year. Powell has indicated in the past that a total of seven interest rate hikes - the maximum allowable under the central bank’s calendar of meetings this year - were on slot for 2022. More rate adjustments could follow in 2023 until a return to the 2% inflation target is achieved, he said.
Some economists, however, doubt that the Federal Reserve will be able to pull off a soft-landing for the economy.
They fear that the economy, finally on the path to resilience after the damage wrought by the two-year long coronavirus pandemic measures, will head for recession again from the central bank’s actions.
Powell, in response, acknowledged the challenges by the central bank in trying to balance interest rate hikes with economic growth.
“And it’s quite challenging to accomplish that right now, for a couple of reasons. One is just that unemployment is very, very low, the labor market’s extremely tight, and inflation is very high,” he said.
The Federal Reserve, however, was willing to err on the side of high rate hikes rather than allowing higher inflation, which “would mean a much deeper downturn,” Powell added.