The U.S. central bank raised rates by 75 base points on Wednesday and indicated that they could go even higher than investors have expected, as their rate-setting committee believes it could go as high as 4.6% in 2023, where investors had been betting on a peak of around 4.4%, according to the Atlanta Fed. 

Two years of slow growth and unemployment hitting 4.4%, equating to a 1.3 million in joblessness. It’s a cost that’s worth bearing, especially because if Chair Jay Powell is wrong, he passes the problem onto U.S. President Joe Biden.

GDP growth could slump to 0.2% this quarter and 1.2% a year from now, which remains far below the 2% the Fed thinks is the norm for the long term.  The rate-setters believe all will be back on track by the end of 2024. 

In the short term this will hurt business, and some are already squeaking from slowing growth, but it’s better than a long, slow grind.

Based on previous interest-rate cycles, the Fed is either being optimistic or trying to break the bad news gently. Even so, Powell is correct to say that inflation is worse than even a reversal in growth as unemployment brings distress for millions, but rising prices hurt everyone. 

Indeed, the risk that an economic slowdown does lasting damage is slight. Banks are reporting that their customers still have more money in the bank than they did before Covid-19 hit, and delinquencies are ticking up, but only slowly. 

Around half of small businesses now say inflation is their biggest challenge, according to the U.S. Chamber of Commerce, and the public agrees, a Pew survey showed in May.

JPMorgan Chief Executive Jamie Dimon told a Congressional panel hours before the Fed’s rate hike that the financial industry can “easily handle a hard landing.”

Powell lamented on Wednesday that there’s no way to reset the economy without pain. That’s the kind of thing an independent central banker can say without fear. 

If the severity of that pain is greater than he is expecting now, he can always toss the hot potato over to Biden and Congress. They will have to spend the next two years dealing with elevated unemployment and economic glumness. 

Powell’s approach may kill inflation but risk losing him some powerful friends in the process.