Michael Barr, the Federal Reserve vice chairman of supervision, said on Tuesday that inflation is “far too high” and predicted that the US economy would soften after a report announced inflation could be slowing.
“I think that if that's the case, we are going to see significant softening in the economy,” Mr Barr told Congress, although he declined to offer a specific forecast for how high the unemployment rate may rise.
Later he added: “There is not a recession right now — we're in a period of slower economic growth.”
The Nasdaq and S&P 500 rose slightly on Tuesday after a report was released on the producer price index, which is seen as a measure of wholesale inflation. The PPI rose 0.2 per cent in October, the report said, lower than previously estimated.
And a consumer price index report last week said that inflationary pressure was slowing.
Pressed by John Kennedy, a senator from Louisiana, about predictions from economists such as Jason Furman and Lawrence Summers that unemployment would need to rise substantially to bring down inflation, Mr Barr said he does not have a precise forecast, though the unemployment rate will be an “important factor” in setting policy.
Mr Barr is also a monetary policymaker with a permanent vote on Fed interest rate decisions.
He said a weakening outlook for the economy was another risk to the financial system.
Since March, the Fed has raised its benchmark interest rate from near zero to a range of 3.75 per cent to 4 per cent, including four straight increases of three quarters of a percentage point.
Rate increases are likely to continue into early 2023, though they are projected to slow their pace amid some promising signs that inflation pressures have begun easing.
Still, the tighter financial conditions engineered by the Fed pose risks for banks, Mr Barr said.
“A weaker economy could put stress on households and businesses and, thus, on the banking system as a whole.”
Reuters contributed to this report