WASHINGTON—The Federal Reserve delivered its bluntest reckoning Wednesday of what it will take to finally tame painfully high inflation: Slower growth, higher unemployment and potentially a recession.
Before the Fed’s policymakers would consider halting their rate hikes, he said, they would have to see continued slow growth, a “modest” increase in unemployment and “clear evidence” that inflation is moving back down to their 2 percent target. Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3 percent in August compared with a year earlier. Those declining prices at the gas pump might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.
In their quarterly economic forecasts, the Fed’s policymakers also projected that economic growth will stay weak for the next few years, with unemployment rising to 4.4 percent by the end of 2023, up from its current level of 3.7 percent. Historically, economists say, any time unemployment has risen by a half-point over several months, a recession has always followed.
Powell warned in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2 percent target was “unconditional.” The law may help lower prescription drug prices, but outside analyses suggest it will do little to immediately bring down overall inflation. Last month, the nonpartisan Congressional Budget Office judged it would have a “negligible” effect on prices through 2023. The University of Pennsylvania’s Penn Wharton Budget Model went even further to say “the impact on inflation is statistically indistinguishable from zero” over the next decade.