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Federal Reserve Chair Jerome Powell warned of recession if inflation gets worse and the central bank is forced to tighten monetary policy too much.
“If inflation does become too persistent, that will lead to much tighter monetary policy, and that could lead to a recession,” Powell said during his nomination testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs.
Powell sounded upbeat when talking about the U.S. economy and employment while promising to get inflation under control.
“This year, we see an economy where the labor market is recovering rapidly, and inflation is well above 2%. This tells us is that the economy no longer needs or wants the highly accommodative policies we had in place to deal with the pandemic. But it is a long way to normal,” he said.
The Fed sees inflation pressures on track to last into the middle of this year. However, if inflation is more persistent, Powell said the central bank is prepared to raise rates more over time.
Powell also revealed his take on policy normalization, stating: “We are going to end asset purchases in March. We will raise rates. And at some point this year, we will let the balance sheet runoff. We’ll have the ability to move sooner and a little faster this time around.”
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