“The clock is kind of ticking how long you’re going to last in low inflation mode… The risk is because a lot of the shocks you start to go into higher inflation mode and our job is literally to prevent that and we will,” Powell said at a European Central Bank conference.
While “there’s a risk” the Fed will slow the economy more than necessary to bring inflation back to the central bank’s 2% target, Powell said: “I wouldn’t agree that it’s a bigger risk. The bigger mistake is not restoring price stability. ”
Restoring this control over inflation is necessary, even if it means raising interest rates to levels that push the economy into recession or lead to rising unemployment.
New data on Thursday is expected to show the consumer price index held on to more than three times the Fed’s inflation target of 2% in May. The lack of progress in bringing inflation back to that level prompted the Fed to raise interest rates by three-quarters of a percentage point earlier this month, and policymakers said they were ready to announce another such hike at its May 26-27 monetary policy meeting. will be approved in July.
Powell said the US economy remains “in fairly strong shape” and said it can cope with tighter credit conditions while avoiding a recession or even a significant spike in unemployment.
But the path to that so-called “soft landing” will become “much more challenging” the longer high inflation continues, Powell said, and policymakers are especially wary of the risk that public expectations about future wages and price behavior could eventually also changed. to the top.