Elizabeth Warren warns that the US will suffer a devastating recession if the Fed doesn't ease rate hikes

• The Fed's aggressive rate-hike cycle risks pushing the US economy into a recession, Senator Elizabeth Warren said Wednesday.
• Before the Fed's latest increase, she told CNBC the fast pace of tightening won't control some of the factors contributing to elevated inflation.

This year's pace of fast and big interest rate increases by the Federal Reserve puts the US economy at risk of a recession and won't tame hot inflation, US Senator Elizabeth Warren told CNBC on Wednesday.

The Democrat representing Massachusetts was interviewed before the Federal Open Market Committee delivered its fourth rate hike of 2022. The increase of 75 basis points was widely expected and puts the fed funds rate at a range of 2.25% to 2.5%.

The Fed has embarked on an aggressive rate-hiking cycle as it races to pull down high consumer price inflation. US CPI soared to 9.1% in June, the highest rate since November 1981.

Supply chain problems, COVID outbreaks worldwide, Russian President Vladimir Putin's invasion of Ukraine in February, and "near-monopolies that are engaging in price gouging" are some of the causes of high inflation, the lawmaker said.

"And increases in the interest rate won't fix any of this," said Warren, adding that Fed Chairman Jerome Powell has "admitted" to that in testimony before Congress.

"And yet he continues to drive forward with what so far have been historically fast, aggressive, high interest rate increases. So if it's not going to help bring down a lot of the prices in our economy, what it can do is actually pitch this economy into a recession," she said. "So I think that that's something the Fed should consider and I think they should moderate this aggressive attack."

During his press briefing Wednesday afternoon, Powell said a slower pace of increases will likely be appropriate as rates gets more restrictive.

Since the Fed began raising rates in March, they have gone up by 25, 50 and 75 basis points. The latest one matched June's hike of 75 basis points, which was the first since 1994 when Alan Greenspan was serving as the head of the US central bank.

Stocks this year have been pushed into a bear market on concerns that the series of rate hikes will pull the world's largest economy into a recession.

US GDP in the first quarter contracted by 1.6%, and a second straight quarter of declines would mark a so-called technical recession. An initial reading of second-quarter GDP is due on Thursday. An Econoday consensus estimate puts growth at 0.5%, with estimates ranging from a contraction of 1.1% to an expansion of 1.5%.

"Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low," the FOMC said in a statement Wednesday. Members of the committee voted unanimously to kick up borrowing rates.

The Fed said inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

The central bank in aiming to tackle inflation and depress demand "is trying to sharply raise rates so that businesses will contract so that they will either cut hours for employees or lay employees off. That means a lot of pain imposed on people," said Warren.

"[We] need to have responses that are calibrated to the problem. And we need to be very careful about saying the solution is to put more people out of work," she said.