Why Powell thinks the Fed can control inflation without a recession

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Inflation remains more than double the Federal Reserve’s target, the financial sector is reeling from a trio of bank failures and calls from economists for an impending slowdown grow louder by the day. . But for Fed Chairman Jerome Powell, the chances of the central bank succeeding in defying history and slowing price growth without crushing the economy remain not only possible, but likely – and the Fed’s work could be almost finished.

“I still think it’s possible this time will be really different,” Powell told reporters on Wednesday after the Fed moved to raise rates for the 10th consecutive time this tightening cycle, to just over 5. %. “Avoiding a recession is, in my view, more likely than having a recession.”

Powell’s outlook on the way forward for the U.S. economy has sparked a wave of optimism after a series of recent economic and financial setbacks spooked investors and rekindled recession fears. In his remarks to reporters, he argued that the remarkably resilient labor market could be strong enough to stave off an economic downturn and that wages could return to a more typical pace as demand for workers declines, even if unemployment never rises noticeably.

The fact that the jobless rate remained near a record low despite 5 percentage points of rate hikes since last March increased the possibility, he suggested, that the labor market could continue to cool gradually. without widespread layoffs.

Powell also stressed that the banking system is healthy and that the Fed will work to ensure that the banking crises seen in recent weeks do not happen again. And he suggested that because of the way the economy has reacted to both the Fed’s rate hikes and the tightening of credit conditions due to the fallout from the banking sector, the central bank may have just raise the fed funds rate for the last time this cycle .

“It feels like we’re much closer to the end than the beginning,” Powell said.

Admittedly, the outlook was not entirely rosy. The Fed Chairman left the door open for further tightening if new economic data warranted another interest rate hike, while acknowledging that his no-recession forecast would be “against history” and that a slowdown cannot be ruled out.

Still, his comments overall came off as remarkably bullish on the way forward for the central bank as it enters a trickier stage of its tightening cycle and tries to navigate its way to a finish line. elusive. Federal Open Market Committee officials were unanimous in their decision to raise rates again, suggesting that each member viewed the economy as strong enough to withstand further tightening.

Powell was careful not to tie the Fed’s hands on what comes next. Its repeated emphasis on adopting a “data-dependent” approach means the central bank has abandoned the idea, at least for now, of providing investors with explicit guidance on what to expect when the FOMC will meet again towards the end of June.

But the focus on continued economic strength and resilience suggests the Fed remains open to further policy tightening, even if it means economic fallout, given that inflation remains the central bank’s primary target. . Despite recent banking instability, the Fed continues to be more concerned about not doing enough to control inflation than over-tightening.

The committee “maintains a hawkish policy stance so as not to encourage financial market participants to get ahead of expectations of lower rates and undue easing of financial conditions,” wrote Richard de Chazal, macro analyst at William Blair. “The Fed feels like it’s leaving its options open.”

Write to Megan Cassella at megan.cassella@dowjones.com