Federal Reserve Chair Jerome Powell said Wednesday he doesn’t know if higher interest rates will cause a recession, but he does know that the economy has a pay a price in order for inflation to come down.
“We don’t know ― no one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Powell told reporters at a press conference.
The Fed announced another three-quarter-point interest rate hike on Wednesday as part of its strategy to slow inflation by slowing economic growth.
Higher interest rates make money more expensive to borrow, resulting in households and businesses spending less, which in turn should cause businesses not to raise prices as much. But there could be collateral damage in the form of mass layoffs since businesses would be making less money.
The average of economic projections among Federal Reserve officials, released Wednesday alongside the rate hike announcement, suggests higher interest rates could push unemployment to 4.4% next year, with personal consumption expenditure inflation coming down to 2% in 2025.
The current unemployment rate is 3.7%, up from a recent low of 3.5%. One well-regarded economic proposition holds that once the unemployment rate jumps half a percentage point from its prior low, that’s a recession. So the median Fed forecast for next year suggests a recession is coming. (Recessions are officially declared after the fact by the National Bureau of Economic Research.)
Powell cautioned that Fed officials don’t really know what will happen. And he made his most aggressive case yet that it’s possible higher interest rates will merely bring down unfilled job openings without throwing millions of people out of work.
“Vacancies are still almost [at a] 2-1 ratio to unemployed people,” Powell said.
But he stressed that the Fed’s main mission right now is to get inflation down and suggested that failing to reduce it would ultimately be worse than increasing unemployment.
“We’re never gonna say that there are too many people working, but the real point is this: What we hear from people when we meet with them is that they really are suffering from inflation,” Powell said. “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”