Powell: Fed committed to inflation fight, but not trying to trigger recession

By Ann Saphir and Lindsay (NYSE:LNN) Dunsmuir

(Reuters) -The Federal Reserve is not trying to engineer a recession to stop inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, U.S. central bank chief Jerome Powell said on Wednesday.

"We are not trying to provoke, and I don't think we will need to provoke, a recession," Powell said at a hearing before the U.S. Senate Banking Committee, although he acknowledged that a recession was "certainly a possibility" and events in the last few months around the world had made it more difficult to reduce inflation without causing one.

"It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all," Powell said, adding that the Fed in coming months will be looking for "compelling evidence" of slowing price pressures before it eases up on the interest rate increases it kicked off three months ago.

Inflation continues to run well above the Fed's targeted level of 2%. A gauge of price increases that excludes volatile food and energy costs may have flattened out or eased somewhat last month, Powell testified, but Russia's invasion of Ukraine and COVID-19 lockdowns in China are putting continued upward pressure on inflation.

One week ago, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point - its biggest hike since 1994 - to a range of 1.50% to 1.75%, and signaled rates would rise another 1.75 percentage points this year.

That steep rate hike path, designed to slow the economy, has sparked widespread concern about a recession and a weakening of labor markets.

On Wednesday, Powell reiterated that ongoing increases in the Fed's policy rate would be appropriate, with the exact pace dependent on the economic outlook, and he declined to rule out a 100-basis-point move if it proved warranted.

"Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," he said, repeating that policymakers would need to be nimble in response to the incoming data.

'COUGHING UP BONES'

Since the June 14-15 policy meeting, a number of Powell's fellow policymakers have lined up behind his comments last week that the central bank will very likely need to raise rates by either 50 or 75 basis points at its next meeting in July.

Earlier on Wednesday, Philadelphia Fed President Patrick Harker said incoming data would govern which of the two options to deliver. Chicago Fed President Charles Evans signaled later on Wednesday that he also is comfortable for now with continued rapid rate hikes.

But in an indication of how inflation has emerged as a thorny political issue that threatens to tip the balance of power in Congress to Republicans in elections this November, Powell found himself under fire from both the left and right.

Senator Elizabeth Warren, a Democrat representing Massachusetts, took the Fed to task for pushing through rate hikes that raised the risk of a recession that could put millions out of work.

Republican Senator John Kennedy of Louisiana, in one of the more heated criticisms of the Fed's response to inflation, said inflation was hitting his constituents "so hard they are coughing up bones."

The median projection among Fed policymakers released last week showed they expect the target rate to rise to 3.4% by the end of the year.

Overall, Powell did not stray far from his remarks in his news conference that followed the end of the Fed's latest policy meeting, but his assertion that financial conditions had "tightened significantly" seems significant and may herald a slower pace of rate hikes ahead, Karim Basta, chief economist at III Capital Management, wrote in a note.

Interest rate futures ticked higher through the course of Powell's appearance, moderating some of the expectations for additional big rate increases at the Fed's remaining four policy meetings of the year.

While another 75-basis-point increase in July remains seen as the most likely outcome, according to CME Group's (NASDAQ:CME) FedWatch tool, rate futures now signal that the Fed will dial that back to a half-percentage-point rise in September. For year's end, it was increasingly seen as a toss-up between a policy rate in either a range of 3.25% to 3.50% or 3.50% to 3.75%.

Economists polled by Reuters before the appearance see the Fed delivering another 75-basis-point interest 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.

Fed officials' latest projections see economic growth slowing to below trend this year while the U.S. unemployment rate - currently 3.6% - starts to tick higher. Meanwhile, they have materially tempered their expectation for how quickly inflation will subside, with a median forecast for a year-end annual rate easing to 5.2% by their preferred measure from 6.3% as of April. In March, they had put that figure at 4.3%.