Good day. Jerome Powell is set to return to Capitol Hill this morning for the second of two days of testimony, this time before the House Financial Services Committee. In remarks before the Senate Banking Committee yesterday, the Federal Reserve chairman raised the prospect of a recession, underscoring the challenge facing the central bank as it raises interest rates at the most rapid pace since the 1980s to slow the U.S. economy. “The events of the last few months around the world have made it more difficult for us to achieve what we want,” he said, referring to hitting the Fed’s 2% inflation goal with a strong labor market. “We’ve never said it was going to be easy or straightforward,” he added. Separately, Philadelphia Fed President Patrick Harker said it is possible the U.S. will see a modest economic downturn, noting that “we could have a couple of negative quarters.” And a research paper from a senior Federal Reserve economist finds a slightly more than 50% chance of a recession over the next four quarters and a two-thirds probability of a downturn over the next two years.

Now on to today’s news and analysis.

Federal Reserve Chairman Jerome Powell said the central bank’s battle against inflation could lead it to raise interest rates high enough to cause a recession, offering his most explicit warning this year.

“It’s not our intended outcome at all, but it’s certainly a possibility,” Mr. Powell said Wednesday during the first of two days of congressional hearings. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down inflation, which is running at a 40-year high.

• Powell to Head to the House With Interest Rates in Focus

• Russia Hits Grain Terminals in Latest Attack on Food Infrastructure
• Western Brands Are Up for Grabs in Sanctioned Russia
• Europe’s Economy Slows Sharply as Recession Risks Grow

Time N/A: ECB’s Lagarde at European Council meeting in Brussels; Bank Indonesia board of governors meeting; Central Bank of Egypt monetary policy committee meeting; Bangko Sentral ng Pilipinas monetary board meeting
8:30 a.m.: ECB’s Enria speaks at SRB and ECB Joint Conference on ‘The test of time: Banking Union a decade on’
10 a.m.: Fed’s Powell speaks on monetary policy and the economy before House Committee on Financial Services
11 a.m.: Kansas City Fed manufacturing and composite indexes
2 p.m.: Bank of Mexico monetary policy statement
4:30 p.m.: Fed bank stress test results

4 a.m.: ECB’s McCaul on ‘Operational resilience–are banks prepared for the worst?’ at SRB, ECB Conference
6:10 a.m.: ECB’s Fernandez-Bollo speaks at AFME/OMFIF 2nd Annual European Financial Integration Conference
7:30 a.m.: St. Louis Fed’s Bullard and ECB’s de Guindos at UBS Expert Talk ‘Central Banks and Inflation’
10 a.m.: University of Michigan consumer sentiment index for June (final); U.S. new home sales for May
3 p.m.: San Francisco Fed’s Daly at Shadow Open Market Conference

• Former Bank of Canada governor David Dodge says he expects Canada is headed for a mild recession, although adding this could help the economy avoid a period of stagflation. Speaking at a webinar hosted by law firm Bennett Jones, Dodge says what he is forecasting would be a "garden-variety type of recession, not a calamity type," triggered by the Bank of Canada's aggressive rate-rising campaign to cool inflation. (Dow Jones Newswires)
• Another member of the Bank of Canada's governing council, which is responsible for crafting rate-policy decisions, is leaving. BOC said yesterday that former IMF official Timothy Lane is scheduled to retire as deputy governor on Sept. 16. (DJN)
• Sri Lanka’s prime minister said his country’s indebted economy faces collapse after months of double-digit inflation, rolling power blackouts and acute shortages in food and medicines.
• Indonesia's central bank kept its benchmark interest rate unchanged on Thursday, in line with economists' expectations but as many other economies tighten policy to tame rising inflation. (DJN)
• The Philippine central bank raised its benchmark interest rate to rein in rising prices amid a longer-term outlook of elevated inflation in the Southeast Asian nation. (DJN)
• Australia's private sector recorded a fifth straight month of growth in June, but the pace of expansion slowed. The S&P Global Flash Australia Composite Output Index eased from 52.9 in May to 52.6 in June, a five-month low. (DJN)
• The European Parliament approved legislation to tax imports based on the greenhouse gases emitted to make them, a plan sending shudders through the global trading system.
• Consumer confidence in the eurozone declined in June due to the increasing cost of living and a slowdown of the economy, the European Commission said, noting its measure of consumer confidence in the region fell from a revised minus 21.2 in May to minus 23.6 this month. Economists polled by The Wall Street Journal expected a reading of minus 20.5. (DJN)
• Brexit-related changes in trading rules are likely to reduce the U.K.’s labor productivity by 1.3% by 2030, according to research by the Resolution Foundation think-tank and the London School of Economics. (DJN)
• Norway's central bank unexpectedly raised its key policy rate to 1.25% from 0.75% on Thursday, and said it expects to raise the rate further to 1.50% in August. Analysts polled by The Wall Street Journal had expected the central bank to raise its key rate to 1.00%. (DJN)

This newsletter is compiled by James Christie in San Francisco.

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