Consumers are showing signs of cutting spending in the face of high prices. And business surveys suggest that sales are slowing. The central bank is betting that it can slow growth just enough to tame inflation yet not so much as to trigger a recession — a risk that many analysts fear may end badly.

At his news conference, Powell suggested that with the economy slowing, demand for workers easing modestly and wage growth possibly peaking, the economy is evolving in a way that should help reduce inflation.

“Are we seeing the slowdown in economic activity that we think we need?” he asked. “There’s some evidence that we are.”

The Fed chair also pointed to measures that suggest that investors expect inflation to fall back to the central bank’s 2 per cent target over time as a sign of confidence in its policies.

Powell also stood by a forecast Fed officials made last month that their benchmark rate will reach a range of 3.25 per cent to 3.5 per cent by year’s end and roughly a half-percentage point more in 2023. That forecast, if it holds, would mean a slowdown in the Fed’s hikes. The central bank would reach its year-end target if it were to raise its key rate by a half-point when it meets in September and by a quarter-point at each of its meetings in November and December.

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With the Fed having now imposed two straight substantial rate hikes, “I do think they’re going to tiptoe from here,″⁣ said Thomas Garretson, senior portfolio strategist at RBC Wealth Management.

Garretson expects the Fed to raise its key rate by a quarter-point in both September and November before suspending its hikes. He also said he worries that Powell may be underestimating the damage that higher rates are causing the job market. Pointing to a steady rise in the number of Americans seeking unemployment aid, Garretson said that “cracks” may be emerging in what has been a robust labour market.

On Thursday, when the government estimates the gross domestic product for the April-June period, some economists think it may show that the economy shrank for a second straight quarter. That would meet one longstanding assumption for when a recession has begun.

But economists say that wouldn’t necessarily mean a recession had started. During those same six months when the overall economy might have contracted, employers added 2.7 million jobs — more than in most entire years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.

Still, slowing growth puts the Fed’s policymakers in a high-risk quandary: How high should they raise borrowing rates if the economy is decelerating? Weaker growth, if it causes layoffs and raises unemployment, often reduces inflation on its own.

That dilemma could become an even more consequential one for the Fed next year, when the economy may be in worse shape and inflation will likely still exceed the central bank’s 2 per cent target.

“How much recession risk are you willing to bear to get (inflation) back to 2 per cent, quickly, versus over the course of several years?” asked Nathan Sheets, a former Fed economist who is global chief economist at Citi. “Those are the kinds of issues they’re going to have to wrestle with.”

Economists at Bank of America foresee a “mild” recession later this year. Goldman Sachs analysts estimate a 50-50 likelihood of a recession within two years.

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Among analysts who foresee a recession, most predict that it will prove relatively mild. The unemployment rate, they note, is near a 50-year low, and households are overall in solid financial shape, with more cash and smaller debts than after the housing bubble burst in 2008.

AP

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