Powell said the pain that businesses and households will have to endure was preferable to the Fed failing to restore price stability now and having to inflict even more damage on the economy later.
He left the door open to another jumbo 75 basis-point interest rate increase in September, telling fellow central bankers in Jackson Hole that a recent ebbing of US inflation “falls far short” of what policy makers want to see.
Slowing the economy down enough to push up joblessness without tipping the economy into recession will take some luck, however. A weak economy that’s barely growing is much more likely to be knocked off course by an unexpected shock, like a renewed run-up in oil prices.
“We are on the edge and very fragile,” said Moody’s Analytics chief economist Mark Zandi. “If anything at all goes off the rails, we’re going into recession,” though he added that’s not his base case.
What’s more, once joblessness starts to rise, that has knock-on effects to the rest of the economy, prompting households to pull back on their spending and making a contraction in gross domestic product more likely.
The so-called Sahm Rule -- developed by former Fed official Claudia Sahm -- signals the start of a recession when the three-month moving average of the unemployment rate rises by a half percentage point or more from its low in the previous 12 months.
That’s a statistical regularity that’s always held, though Sahm -- who now heads her own consulting company -- cautions that there’s nothing regular about what the economy has gone through since the start the pandemic.
What Bloomberg Economics Says...
“The central bank needs to keep on an aggressive rate-hike course, tipping the scale toward a 75-basis-point increase at the September FOMC meeting.”
—Eliza Winger (economist)
Another sign that a recession will be tough to avoid: The ongoing downturn in the housing market in response to the upturn in Fed interest rates.
In the post-World War II era, there’ve only been three times that such a weakening of housing didn’t lead to a recession -- in 1965-66, 1984-85 and 1994-95, according to Doug Duncan, chief economist at Fannie Mae.
And in each of those cases, the Fed began raising interest rates before inflation had gotten out of hand, which is certainly not the case today. Duncan sees a mild recession starting in the first quarter of 2023.
Bank of America chief US economist Michael Gapen said a recent string of stronger-than-expected data, including on the labor market, has made him less certain that a recession will begin in the second half of this year, though that remains his forecast as the Fed fights to get inflation under control.
“History tells us that more likely than not, getting out of these situations requires more than just a few tenths of an increase in the unemployment rate,” he said.
This article was provided by Bloomberg News.