The Path to a Soft Landing Narrows

Fed Chair Jerome Powell reiterates Fed's commitment to combatting high inflation

Speaking at an ECB conference in Portugal, Federal Reserve Chair Jerome Powell made it clear that that the central bank is committed to combatting inflation, with "no guarantee" that it wouldn’t impact employment. Powell said he still believes that the Fed can achieve a "soft landing," but that it’s gotten harder. “The pathways have gotten narrower,″ Powell said.

Amid signs the U.S. economy is slowing, Powell told at a panel of central bankers that he was more worried about the risk of high inflation, than about the possibility of raising interest rates too high, and potentially pushing the economy into recession.

GDP Declines More Than Expected

Powell’s comments came after a report showed the U.S. economy contracted more than previously estimated in the first quarter. The Bureau of Economic Analysis reported that GDP fell at a rate of 1.6% last quarter, down from last month’s estimate of a 1.5% decline. That was the first drop in GDP since the short and sharp pandemic recession over two years ago. Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate, down from the rate of 3.1% reported last month. 

Today, the PCE Price Index showed few signs of inflation slowing, as it rose 0.6% in May, up from 0.2% in April. It was 6.3% higher from a year ago, at the same rate as in April. The core rate, excluding volatile food and energy prices, rose 0.3% in May, at the same pace as the month before. The core rate was up 4.7% from a year ago, decelerating slightly from April's annual gain of 4.9%.

According to Powell, “there is a clock running” to bring down inflation, even if higher interest rates push the economy into recession or lead to rising unemployment.

"A recession may already be a foregone conclusion if we look at recent surveys. According to a recent survey by Deutsche Bank, 90% of respondents feel that a recession in 2023 is inevitable. The more we talk about recessions, and worry about them, the more we intend to help usher them in as we tighten our belts," said Caleb Silver, Editor-in-Chief of Investopedia.

Fed Funds Target Range Probabilities For July FOMC Meeting
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