Why the Fed is risking a recession

Recession fears are rise in power as the Federal Reserve embarks on an aggressive campaign to raise interest rates, and politicians and...


Recession fears are rise in power as the Federal Reserve embarks on an aggressive campaign to raise interest rates, and politicians and members of the public increasingly question why central bankers plan to cause trouble for the economy.

The short answer is: it’s the tool the Fed has to control inflation.

The central bank is trying to force the rise in prices to slow down. It does this by raising interest rates, which makes mortgages, auto loans, and business loans more expensive. As silver becomes more expensive, it weighs on spending and hiring, weakening the job market and the economy in general, perhaps in particular. Slower growth will give supply a chance to catch up with demand.

The adjustment process is already unpleasant: Stock prices have fallen, home sales are starts to slow down and unemployment is expected to rise. But the Fed has a way to bring inflation back in line, and that’s by hammering households and businesses until they stop spending so much. Central bankers have acknowledged that the transition could be bumpy and that a recession is a real risk.

“Monetary policy is notoriously a blunt tool,” Fed Chairman Jerome H. Powell said in testimony before senators on Wednesday. “There is a risk that lower results are certainly possible, but that is not our intention.”

At the same time, they say, failing to try to calm inflation – allowing it to continue to rise and take root – would be the biggest problem.

“It’s very high inflation, and it’s hurting everyone,” Powell said.

Fed officials have argued that they may be able to slow the economy enough to allow inflation to moderate without stifling demand to the point of plunging America into recession. Central bankers forecast last week that they will raise unemployment slightly, but not significantly, this year and next year.

But this soft landing is far from certain. As shocks continue to rock the economy — the war in Ukraine has driven up food and fuel prices, Chinese shutdowns to contain the pandemic have slowed factory output, and shipping grumbles persist — the central bank may have to slow demand even further to introduce it in the face of a limited supply of goods and services.

“It’s definitely a possibility; that’s not our intention at all,” Powell said of a recession. “Certainly the events of the past few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a still strong job market.”

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Newsrust - US Top News: Why the Fed is risking a recession
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