Federal Reserve Chairman Jerome Powell warned Congress on Wednesday that the central bank's rate hike policy could trigger a recession.
In response to a question from Senator Jon Tester, a Democrat from Montana, Powell said that a recession was a "possibility."
The Fed has been trying to maintain a soft landing for the US economy by raising interest rates gradually. However, with inflation running at a four-decade high, it is challenging to not trigger a recession.
The comments made by Powell on Wednesday highlighted how difficult it will be for the Fed to achieve its goals of maintaining a strong labor market and 2% inflation.
"Frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a strong labor market," said Powell.
Powell added that the Fed will closely watch for signs that inflation is starting to slow down. He said the central bank can't fail at its goal of 2% inflation.
"Over the coming months, we will be looking for compelling evidence that inflation is moving down," Powell said. "We can't fail at that task."
Increasing interest rates to combat inflation
Last week, the Fed raised its key interest rate for the third time last week to combat rising inflation. Although the central bank did not alter its monetary policy, it decided to increase the rate by 75 basis points, the biggest increase since 1994. Officials also noted that they would likely raise the rate by another 50-75 basis points at their next meeting in July.
Despite the various warnings that the Fed's rate hike policy could trigger a recession, Powell noted that it was still not an inevitable event. He also said that the central bank's rate hike would gradually fight inflation in the long run.
"We are not trying to provoke and do not think we will need to provoke a recession [to bring down inflation]," Powell said.
Criticism from both sides
During his testimony before the Senate Banking Committee, Powell was criticized by both parties. Republicans criticized the Fed for maintaining its "transitory" inflation narrative for too long, while Democrats criticized the chairman for moving the country toward a recession.
Louisiana Senator John Kennedy, a committee member, said that inflation was affecting his state's constituents so severely that they were "coughing up bones."
During his testimony, Kennedy called on the Fed chairman to take immediate action to combat rising inflation. He said that the country was in a mess and that the chairman was the most influential person in fixing the problem.
"We got a hell of a mess right now," Kennedy said. "You're the most powerful man in the United States, maybe in the world."
Massachusetts Senator Elizabeth Warren, who was also a committee member, criticized the Fed's actions in fighting inflation. She said that the central bank's tools were not enough.
Senator Warren asked the Fed chairman if he would consider increasing the interest rate to help lower the rising prices of food and gas. Powell admitted that his policies would not significantly impact these areas.
In response, Warren said that the Fed's efforts to combat rising inflation might be worse than the problem itself. She warned that the country would be in a recession if the central bank's policies were not focused on the specific issues that caused the inflation.
"You know what's worse than high inflation and low unemployment?" Warren said. "It's high inflation and a recession with millions of people out of work."