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Federal Reserve Chair Jerome Powell signals tough inflation battle ahead

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Federal Reserve Chair Jerome Powell said there’s “no guarantee” the central bank can tame runaway inflation without harming the labor market.

Speaking at a European Central Bank forum in Sintra, Portugal, Powell reiterated his hopes that the Fed can achieve a so-called soft landing — raising interest rates just enough to slow the economy and curb rising consumer prices without cause a recession and a sharp rise in unemployment.

“We believe we can. That’s our goal,” he said. But the Russian invasion of Ukraine, he said, had made the job harder by disrupting trade and drive up the price of foodenergy and chemicals.

“It’s gotten harder,” Powell said. “The trails have gotten narrower.”

ECB President Christine Lagarde reiterated the “major impact” of energy shocks, rippling globally but being acutely felt in Europe due to the dependence on Russian oil and natural gas† She also pointed to Europe’s proximity to the war in Ukraine, saying that “energy was vastly underestimated” in the bank’s assessment of inflation.

The ECB and the Fed were slow with recognize the threat of inflation that started a little over a year ago. They believed that rising prices were the temporary result of supply chain problems as the economy recovered with unexpected speed from the brief but devastating coronavirus recession in 2020.

But inflation kept increasing. The Fed raised its benchmark short-term interest rate in March and May and appeared poised for another half percentage point hike at its June 14-15 meeting.

Subsequently, the Department of Labor reported that consumer prices were up 8.6% in May from a year earlier — the biggest jump since 1981. The Fed responded by raising interest rates by three quarters of a percentage point — biggest increase since 1994.

Europe’s central bank backs the Fed, but said it did increase rates in July for the first time in 11 years and again in September to target inflation is at record 8.1% in the 19 countries that use the euro. In a speech that opened the ECB forum on Tuesday, Lagarde said the bank will move gradually with hikes, but keep its options open for: stamping inflation if it rises faster than expected.

Economists are increasingly concerned that higher rates could push the economy into recession

However, Powell pointed to a strong labor market — the unemployment rate has been low at 3.6% for nearly half a century — and noted that most households and businesses had healthy savings.

“Overall,” he said, “the US economy is well positioned to withstand tighter monetary policy.”

Lagarde noted that the same was true of Europe.

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