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Failure “not an option”: The Fed vows a comprehensive fight against inflation

“The worst mistake we could make would be to fail,” said Powell, who has been reappointed by President Joe Biden to run the central bank for another four years. “That’s not an option.”

The Fed’s new aggressive moves appeared aimed at reassuring the public, which has consistently ranked inflation as one of their top concerns. But the policy has also raised fears that the central bank could trigger a recession in its bid to contain inflation. While policymakers themselves are hoping to avoid that outcome, they are nevertheless forecasting some economic woes and expecting the unemployment rate – which at 3.6 percent is now near modern lows – to rise over the next few years.

The Fed also forecasts the U.S. economy to grow 1.7 percent in both 2022 and 2023, a significant downgrade from the 2.8 percent and 2.2 percent rates it forecast in March for those years. Powell said there is still a way to avoid a full-blown downturn.

“We’re not trying to create a recession,” he said emphatically when asked by a reporter about the Fed’s intentions. “Let’s get that straight.”

Still, he acknowledged that the central bank is not simply rolling back the extraordinary boost it has given the economy with ultra-low interest rates and massive government bond purchases. It is planned to actively curb growth.

The Fed’s belt buckle is likely to darken an already somber national mood and could lead to a more serious election choke for Biden’s Democrats in this year’s midterm elections. But the central bank is betting that more decisive action now will prevent more economic pain down the road.

Indeed, it is clear that one aim of the central bank’s latest move was to convince the American public that it is serious about fighting inflation, even if there is collateral damage.

“We need to restore price stability,” Powell said. “That is the foundation of the economy. Without price stability, the economy will not function as it should.”

Powell and the Fed have been scathingly criticized by Republicans – and even some Democrats – for what they see as cautious moves by the central bank to curb inflation.

Even after Wednesday’s action, the Fed’s main interest rate range is between 1.5 percent and 1.75 percent, still near historic lows.

For weeks, politicians had announced that they would raise interest rates by half a percentage point. But after a widely watched inflation report came in worse than expected on Friday, they quickly pivoted to take more drastic action — a rare move by the central bank.

In the remaining four sessions of this year, policymakers expect to raise interest rates to 3.25-3.5 percent — much higher than previously expected.

Even with a steeper interest rate path, Fed officials don’t expect to stop price spikes this year as Russia’s invasion of Ukraine and Covid-related lockdowns in China continue to fuel price inflation, which gained momentum last year. They now expect prices, as measured by the price index of personal consumption expenditure, to rise 5.2 percent in 2022, compared to their earlier hopes of 4.3 percent.

But they forecast inflation to fall to 2.6 percent in 2023. The Fed’s target rate is 2 percent.

Failure “not an option”: The Fed vows a comprehensive fight against inflation

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