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Federal Reserve Chair Jerome Powell on Thursday said it is possible that inflation can cool without a large increase in the unemployment rate.
Asked by Sen. Tina Smith, a Republican from North Dakota, if he saw “a path for inflation to continue slowing without seeing significant job losses and doing harm to middle class families,” Powell replied: “I do.”
Powell said the labor market is gradually cooling and “that’s what we would want to see.”
Economists say the biggest surprise of the U.S, economy this year has been the continued strength of the labor market despite the Fed’s rapid pace of rate hikes over the past 15 months.
On the one hand, economists say the resilient labor market means the Fed’s tightening of monetary policy will result in a “soft landing” or a “mild recession” for the economy.
But other economists worry that the strong labor market could ultimately make it harder to bring down to the central bank’s 2% target.
Harvard economist Jason Furman told the New York Times that there is a “bad scenario” where the unemployment rate will need to rise closer to 10% to get inflation back to target.
The unemployment rate is now 3.7% and Fed officials have forecast that it will rise to 4.5% by the end of 2024.
At the hearing, Powell repeated that a “strong majority” of Fed officials think the Fed will engineer two more 25 basis point rate hikes by the end of the year. That would bring the Fed’s rate to a range of 5.5%-5.75%.
Powell also said that the Fed is working with small banks that have a concentration in commercial real estate loans.
The swift collapse of Silicon Valley Bank earlier in March put a spotlight on potentially painful losses lurking at banks from trillions of dollars in commercial-real-estate loans on their books. Office building valuations have dropped sharply as many Americans continue to work from home.
Republicans on the Senate panel argued the Fed’s plans to raise capital standards on banks in the wake of the bank failures this spring will hurt the banking sector and lead to less lending to businesses.
“My question is how much is too much? And when is enough enough? The higher the capital standards, the lower the capital for the private sector, which means fewer loans and less capital for those who are actually creating jobs,” said Sen. Tim Scott, the ranking Republican on the Banking Committee.
Powell said the Fed has not yet finished work on its plan to raise bank capital. He said he didn’t expect the final version to raise capital standards on banks with less than $100 billion in assets.
