No Soft Landing, No Return to Normal for US Economy, Says Fed
Jerome Powell, the Chairman of The Federal Reserve, has conceded that a so-called “soft landing” for the U.S. economy is something he cannot guarantee.
Powell went on to say that the COVID-19 pandemic may have forever altered the global economy, casting doubt on whether the U.S. and the wider world will ever return to a “normal” pre-pandemic state.
The comments came during a panel discussion at a European Central Bank policy conference in Sintra, Portugal.
The Federal Reserve is battling to reduce inflation of 8.6%, its highest level in 40 years. To curb it, the Fed has implemented a series of strong interest rate hikes. Increasing interest rates can reduce inflation, but also poses the risk of cooling the overheated economy too quickly.
Economy flips hot to cold
The result is that an overheated economy can flip from hot to cold; from high inflation to a recession and increasing unemployment. Powell is still trying to avoid that scenario.
“We think that there are pathways for us to achieve the path back to 2% inflation while still retaining a strong labor market. We believe we can do that,” said Powell as reported by Marketwatch, but, he added, “there’s no guarantee that we can do that.”
Powell may be determined to find the economy’s magical Goldilocks zone, but he has detractors who question his appetite for doing what is necessary. Last week, former Secretary of the U.S. Treasury, Larry Summers, stated that unemployment needed to rise to combat inflation.
Summers said: “We need five years of unemployment above 5% to contain inflation. In other words, we need two years of 7.5% unemployment or five years of 6% unemployment, or one year of 10% unemployment.”
Summers went on to say, “Is our central bank prepared to do what is necessary to stabilize inflation if something like what I’ve estimated is necessary?”
No return to normal
Powell continues to grapple with the hyper-complex machine of the U.S. economy, but has his doubts whether a return to normal is now even possible.
“The economy is being driven by very different forces. What we don’t know is whether we’ll be going back to something that looks like, or a little bit like, what we had before,” said Powell as reported by CNN.
Christine Lagard, President of the European Central Bank, echoed those very concerns. Talking about the pre-COVID levels of inflation, Lagard said: “I don’t think we’re going back to that.”
Powell went on to list a number of reasons why pre-COVID inflation may be a thing of the past, including the war in Russia and supply-chain issues. All that said, the risk posed by high inflation has forced Powell to make his call.
In a point that will no doubt please Larry Summers, Powell concluded: “Is there a risk that we would go too far [increasing interest rates]? Certainly there’s a risk, but I wouldn’t agree that that is the biggest risk to the economy. The bigger mistake to make would be to fail to restore price stability.”
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