Amid high inflation, the Federal Reserve has messaged that it wants to slow the pace of price increases while preserving low unemployment.
But Fed Chair Jerome Powell acknowledged Wednesday that “there is no guarantee” that the Fed can achieve that outcome — often referred to as a soft landing.
“It’s gotten harder, the pathways have gotten narrower,” Powell said at a European Central Bank event on Wednesday. “Nonetheless, that is our aim and there are pathways to achieve that.”
Powell’s remarks point to a growing admission within the central bank that job loss may well be the cost of lowering inflation, as the Fed continues to ratchet up borrowing costs to dampen spending.
The Fed chief said recent events have made it “significantly more challenging” to address high prices, pointing specifically to Russia's invasion of Ukraine. Fuel oil prices have jumped about 36% as nations used sanctions to try and isolate Russian gas and oil from the global supply.
Inflation data for May confirmed energy prices remained a major driver of overall price pressures, and this data helped, in part, push the Fed into a larger-than-planned interest rate increase in its June policy-setting meeting. The Fed's 0.75% increase in its benchmark interest rate was its largest in a single meeting since 1994.
'A real dilemma'
The supply of oil is out of the Fed’s control, though these prices continue to influence policy.
The central bank has, however, noted that its interest rate policies can help dampen consumer demand that is also contributing to pricing pressures, both in energy markets and other sectors of the economy.
Some companies have boosted prices as Americans tapped into excess savings to spend more on goods and services as the economy re-opened, and higher rates may have the effect of curbing that spending.
That has driven the Fed to implement interest rate increases at a pace not seen in over two decades. Since the start of the year, the Fed has raised interest rates by 1.50% and messaged its intention to further increase borrowing costs through the end of this year.
But raising interest rates has also historically come with a rise in job losses, as businesses slim down due to lower economic activity.
Jurrien Timmer, director of global macro at Fidelity Investments, said that he does not see a recession as imminent. But he cautioned that once inflation starts to show signs of slowing, the Fed will have to decide how much further it wants to push inflation down at the risk of putting Americans out of jobs.
“That is the moment where I think the Fed has a real dilemma, because then it has to choose whether to accept higher than targeted inflation to save the economy,” Timmer told Yahoo Finance on Wednesday. “I don’t think we’re there yet, but we could get there at some point.”
For the Fed’s part, Powell said the economy is in “pretty strong” shape, adding that households and businesses do not yet show recessionary wear.
“Overall, the U.S. economy is well-positioned to withstand tighter monetary policy,” Powell said Wednesday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.