Federal Reserve chairman Jerome Powell signaled the U.S. economy is at risk of tipping into a recession.
Despite the central bank’s best efforts to pull down inflation by increasing interest rates and slowing demand, he warned on Wednesday that the soft landing for the economy that the Fed had been working toward could be “very challenging.”
“The other risk though is that we would not manage to restore price stability, and that we would allow this high inflation to get entrenched in the economy,” Powell said during a Senate Banking Committee hearing.
“We can’t fail on that task. We have to get back to 2% inflation.”
The central bank generally views 2% inflation as the normal, desired baseline for the economy. As of May, the inflation rate sat at 8.6%, a 40-year high.
The Fed has raised interest rates three times so far since March, and said it would continue on that path through the rest of the year. Powell said central bank officials “anticipate that ongoing rate increases will be appropriate.”
Market watchers say the Federal Reserve is trying to thread the needle of cooling off inflation while not tanking the broader economy.
“Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” Mark Hamrick, senior economic analyst at Bankrate, said in a note.
So far, he said, the Fed’s actions have caused stocks to fall and made borrowing much more expensive, especially in the housing market, where mortgage rates are now the highest in over a decade.
Investors seemed to shrug off Powell’s remarks. The Nasdaq, S&P 500 and the Dow Jones Industrial Index were all in positive territory midday on Wednesday.