Many central banks are now raising interest rates sharply. The US Federal Reserve acknowledges that there is certainly a risk that it will end in an economic downturn.
Powell commented on the risks of an economic slowdown during a panel discussion with other central bank governors on Wednesday.
– Is there a risk that we might go away? Fed Chairman Jerome Powell said during a panel discussion (see via Youtube).
The comment came during a panel discussion at the European Central Bank (ECB) conference held in Sintra, Portugal on Wednesday.
Other participants in the session included European Central Bank Governor Christine Lagarde, Bank of England Governor Andrew Bailey and Augustin Carstens, who heads the Bank for International Settlements.
During the conversation, Powell was challenged by economist Paul Krugman (via Bloomberg) that there is a risk that the Federal Reserve will go too far in its increases, and that there will be a real economic contraction in the US.
However, Powell believed that the bank should take action to curb inflation.
We will certainly welcome it if inflation falls more than expected, and we will take that into account when setting our interest rate. The way to do that, Powell says, is to curb growth, but ideally, keep it positive, and rebalance supply and demand.
– He says the biggest mistake we make – put it this way – is the failure to restore price stability.
The shopping spree is over: – I hope people have taken into account the higher interest rates
Several sharp jumps in interest rates
The US Federal Reserve has a target for inflation (inflation) to remain at around 2 percent over time. Inflation in the US was surprisingly strong at 8.6 percent in May.
Norway has the same inflation target, but inflation here was 5.7 percent in May compared to the previous year. Core inflation is at 3.7 percent, and the Norges Bank expects it to remain above the target until the end of 2025.
Recently, many central banks have been in a hurry to raise interest rates in the hope of combating price hikes.
Last week, the Bank of Norway raised the interest rate by 0.5 percentage point, instead of the usual increase of 0.25 percentage point. This was the largest increase in 20 years, and a number of further increases are expected in the second half of the year.
The US Federal Reserve has also gained momentum, as the rate tripled by 0.75 percentage points in June, the largest jump since 1994. The Fed has raised rates three times since March, indicating chances of a new triple hike in July. .
The Federal Reserve raises interest rates by 0.75 percentage points
More expensive energy
The ECB governor notes that part of the recent price increases are due to the rising cost of energy, such as oil and gas, and petroleum products such as gasoline and diesel.
The energy shock that hits us, hits us, and may continue to hit us, has a huge impact. This is not limited to Europe, says Lagarde.
Energy is becoming more expensive because supply is unable to meet demand, and it is also linked to changes in Russian energy demand. This will not necessarily change even if interest rates are raised.
It’s a powerful driver of inflation, says Lagarde.
Powell acknowledges that the interest rate instrument does not always fit the task.
We don’t have precise instruments, and the interest rate instrument is known to be an approximate instrument, says Powell.
– The clock is ticking
The US Federal Reserve says that the important thing for the central bank is to avoid inflation staying at a higher level than before, and that people are starting to get used to high inflation.
If residents and businesses believe that prices will only continue to rise, in the worst case it could be a self-fulfilling prophecy, central bank governors fear.
“Our job is to prevent that from happening,” Powell said.
Inflation in the US has now increased over time. For a long time, central bankers insisted that it was temporary. Powell now believes that it is necessary to take action to ensure that people have confidence in monetary policy and that inflation does not become runaway.
– The clock is ticking. We’ve had high inflation for over a year. No one should wait, and it would be poor risk management to assume that these expectations will continue to hold indefinitely when one sees such high inflation. So we don’t, he says.
Extreme downside risk
After the Federal Reserve raised interest rates threefold recently, Chief Economist Marius Gunsholt Hof at Handelsbanken said that it may be necessary to raise rates so that there is an economic contraction (stagnation) in order to reduce demand and curb inflation.
What matters to the Fed in the first place is inflation. Huff told E24 earlier in June that if they had to push the economy into recession, they would.
Powell still hopes for a “soft landing,” meaning he can control inflation without causing an economic downturn. But he notes that they are demands after the Russian invasion of Ukraine, which contributes to the increased cost of food, energy and chemicals.
It’s getting more and more difficult, says Powell.
He makes no guarantees that the Fed will be able to bring down inflation while avoiding a recession, but he promises to do its best. The president of the European Central Bank is doing the same.
I understand the pain people are going through dealing with high inflation. Powell says we have the tools to solve this problem and are ready to use them.
“The process will likely cause some pain, but the biggest pain will come from failure to deal with high inflation and allow it to continue,” Powell said.
So says Lagarde.
If they have to push the economy into recession, they do
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