By Howard Schneider

WASHINGTON, (Reuters) – The U.S. economy outlook is uncertain, despite a conflict in Europe, a pandemic holding down some parts of the global economic system, and the financial markets turning sharply volatile.

Jerome Powell, the Federal Reserve Chair, gave this week his most comprehensive account of how he plans to confront a future generational inflation shock and avoid a significant rise in unemployment.

Many things could go wrong. This includes an inflation problem that is even worse or an unexpected economic collapse.

Powell Fed tries to address both.

Here’s how:

BEND DOES NOT BREAK

Powell made it clear in a Wednesday news conference that the Fed will not hesitate to increase interest rates to combat inflation. However, Powell said with little uncertainty that policymakers were not ready to give a shock treatment such as a three quarter point rate rise.

He made these comments after the Fed said it would double its overnight benchmark rate and reduce its balance sheets by half a point next month.

Analysts felt Powell was unintentionally “dovish” by doing this, but investors remain confident that the Fed will move quickly despite their hesitations.

However, there is another way.

Bill English, former Fed chief of monetary policy and now a Yale School of Management professor said that “I don’t believe it was a slip of tongue”. They don’t want uncertainty so they should move slowly. It’s possible that seventy-five basis points (basis points), might have shaken the system.

READ MY SLIP

Powell made a rare statement when he indicated the possibility of half-point rate hikes at Fed’s next meeting.

Forward guidance by Fed is traditionally made with modifiers such as “gradual”, which investors interpret into a pace for rate increases.

Powell appears more willing to just say what is likely. The third time that Powell has successfully pinned down the future outcomes of meetings was Wednesday’s press conference. Powell could be trying to assert his position as chair, even though decisions cannot be finalized until the policymakers vote. However, he may want his message to remain clear and concise and not muddled by debates among his coworkers.

Vincent Reinhart (ex-chief economist at Dreyfus and Mellon), said that “it is in some way old school monetary policies.” Powell says, “In an atmosphere of uncertainty, we don’t know where we will end up.” But we know the direction to head. The more that we practice it, the closer we’ll be to the destination we want.

“NEUTRAL”, IS BIG TENT

Fed officials have stated that they would raise the Fed Funds Rate “expeditiously” from “neutral” to encourage borrowing and spending by households and businesses. However, it won’t discourage them.

However, it’s a flexible concept that may evolve over time.

Powell clarified Wednesday that Powell’s goal is to achieve “the broad range possible levels of neutral,” officials putting it at between 2 and 3 percent for federal funds rates.

Federal funds rates will shift to half point rather than quarter point rate rises in July. This appeals to officials who wish monetary policies to be more front loaded, or tightened quicker. The Fed can also assess the economic and inflation trends over the coming two months and adjust the rate of hikes accordingly. This is a good thing for those who are concerned about the possibility of triggering recession.

The drive to neutral is an economic concept as well as a policy principle. It keeps policymakers from all sides of the spectrum together without them being bound to any rate increases or final destination.

KILL JOB OPENINGS, NOTJOBS

The unusual aspect of the economic recovery from the pandemic, is that there are nearly twice as many job openings than people searching for work.

Goldman Sachs’ (NYSE:) economists report that there are about 5.6 millions more jobs than total workers. That is a large gap, which could indicate that things may be out of control. This has made it difficult for companies to hire, and could have led to higher wages.

Fed officials hope that there will be a reckoning, not through actual unemployment (which is common in tightening monetary policy quickly), but rather by encouraging businesses to reduce their plans for hiring as more demand falls under higher interest rates.

Powell did not disclose what he was aiming at Wednesday. But in the years just before the pandemic, when the vacancies-to-unemployed ratio was 1.2-to-1, jobs and wages were growing at a sustainable rate, and inflation was near the Fed’s 2% target.

SHE CAN STILL HAVE IT WRONG

Powell has made a virtue out of uncertainty and acknowledged what the Fed cannot control and does not know. He noted that there were signs of inflation peaking on Wednesday, and also warned that more surprises may be ahead. Although he said that the inflationary mindset isn’t taking root, he also opened his press conference appealing to the American public about his promise to slow prices to keep it in check.

Subtext: Always be ready to do anything.