In remarks less than a week after the Fed raised interest rates for the first time since 2018, Chairman Jay Powell acknowledged the historic challenge facing the U.S. central bank: reining in the highest level of inflation in 40 years without causing a “hard landing”. Painful unemployment and a sharp economic contraction.

“No one expected a soft landing under current conditions to be easy,” he warned last month. “It is often said that monetary policy is a blunt instrument that cannot achieve surgical precision.”

Powell underscores his warning with optimism about the U.S. economy’s ability to respond to tighter monetary policy, but his comments underscore how difficult the task ahead will be for the central bank as it sets out after two years of unprecedented support. new route.

He has also fueled a heated debate about the extent of collateral damage to the U.S. economy from higher interest rates.

“There is no doubt that recession risks are elevated,” said Karen Dynan, a Harvard economics professor who has worked at the U.S. central bank. “The Fed is facing its biggest challenge in decades when it comes to tackling inflation.”

The Fed’s mixed record of successfully engineering slowdowns without causing unexpected economic damage has fueled concerns that the central bank will struggle to moderate inflation while sustaining economic expansion.

Since the 1970s, six of the past eight actions to control inflation have been for the Fed to raise interest rates at or above “neutral” rates, which neither help nor limit economic growth, according to Roberto Pey. According to research by Roberto Perli, recessions followed. Piper Sandler’s Global Policy.

Even before the coronavirus pandemic hit businesses and consumers hard, the economy was slowing, Perli said, as borrowing costs dampened demand for housing and other big-ticket items and companies were forced to rethink hiring plans.

Even more worrying is the magnitude of the inflation problem the Fed must now address, March intensifies Because of Russia’s invasion of Ukraine. China’s new Covid-19 lockdown has further hampered supply chains and also risks pushing up prices.

“There is usually a narrow path to a soft landing, and given how far the economy is from the Fed’s goals and how far current policy is from neutral,” said Matthew Luzzetti, senior U.S. economist. The road looks incredibly narrow right now.” Deutsche Bank predicts a recession in 2023.

For much of the past year, the Fed advocated for a tapering of the pandemic stimulus it injected into the economy, assuming inflation would be “transient” and moderate over time.But as price pressures surged and spread to a wide range of industries, the Fed was forced to turn, signaling a growing number of signals in recent months radical policy Economists worry that this could go too far.

Rick Rieder, chief investment officer of global fixed income at BlackRock, was referring to low- and middle-income households.

The Fed is now expected to raise rates by at least half a percentage point this year — a tool it hasn’t used in more than two decades — as part of its efforts to bring its benchmark policy rate closer to neutral, which officials estimate will be about 2.4%.It will also soon begin to rapidly shrink its size $9tn balance sheet Expected to be as high as $95 billion per month.

However, not all economists believe a recession is a foregone conclusion. Like Powell, other senior officials remain confident in the Fed’s ability to execute a soft landing.

Gov. Lael Brainard, who was named the next vice chair, said Tuesday that the strength of the labor market, coupled with “significant underlying economic momentum,” bodes well for such an outcome.

Julia Coronado, a former Fed economist now at MacroPolicy Perspectives, said a shift in consumer spending from goods to services and a waning of fiscal stimulus during the pandemic are also expected to ease inflationary pressures. The U.S. central bank “isn’t doing all the work here,” she said.

In addition, many economists said the Fed will adjust policy based on upcoming data. Donald Cohen, who was vice chairman during the 2008 global financial crisis, said the Fed should fine-tune policy as it did in 1994, when the central bank raised interest rates and guided the economy to a soft landing.

“Chairman Powell and the rest of the committee will be working from the cockpit,” said Gregory Daco, chief economist at EY-Parthenon. “If the nose dives too much, they will either slow down the pace of tightening or relax.” Monetary policy to lift it up a little bit.”

For Dennis Lockhart, who was head of the Fed’s Atlanta branch for a decade until 2017, a bigger risk than a Fed-induced recession is that policymakers again fail to appreciate the magnitude of the inflation problem and tighten policy too slowly.

“I’m more concerned that the Fed underestimated the situation and allowed inflation to really seep through every crack in the economy and be really deeply rooted in the psychology that affects prices, corporate business behavior and wage demands,” Lockhart said. The revival of the labor movement .”