June 15, 2022, 1:05 p.m. ET Jerome H. Powell, the Fed chairman, has predicted that the central bank may be able to achieve a “soft” landing – cooling conditions low enough to allow supply to be met without causing a painful recession. But markets are increasingly doubting that the Fed can do it. Shares are falling, a sign of the bond market that often predicts that the recession is flashing red and consumer confidence is plummeting. The data also do not work together: inflation has proven to be more stubborn than many economists expected, and signs are growing that consumers expect price pressures to continue. That puts Mr Powell in a difficult position on Wednesday, when he will answer reporters’ questions during a press conference at 2:30 p.m. following the release of the Fed’s latest policy statement. Central bankers are expected to raise interest rates significantly in this session, perhaps by a quarter of a percentage point, in a bid to quickly calm the economy and show that they are serious about curbing persistent inflation. Mr Powell will have to explain if a “soft” landing is still possible, how the Fed hopes to achieve it and how its tools will work to reduce inflationary pressures that have shown little sign of easing. Some of today’s rapid price increases are related to supply issues, but these could worsen: strikes in South Korea could disrupt production of semiconductors and other components, and the war in Ukraine continues to drive up commodity costs, with prices of gas in America is expected to go up more this summer. While the Fed can do little to control supply, Powell said there is work to be done on the demand side of the economy. Consumers have spent in a quick clip. But crashing demand to align with limited supply could be a painful process, involving job losses and abnormal adjustment. Given this, Mr. Powell will have to explain why the Fed is considering at least a more aggressive course on interest rates. “We believe this shows that the Fed is more determined to do whatever it takes to end inflation as quickly as possible, even if it increases the likelihood of a hard landing in 2023,” the TD Securities economist wrote. However, the message may be difficult to convey, as some economists warn that the central bank risks overdoing it or complain that it does not have a clear enough strategy. “When the market believes that the central bank is panicking, so is the market,” Evercore ISI researchers wrote before the meeting. See more
