Fed chair sees months of high inflation, then moderation
Jerome Powell, the Federal Reserve chair, told House lawmakers this week that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.
The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.powell testified Wednesday before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4% in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.
“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell said in his opening remarks.
He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.
Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.
He said that longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.
Expectations “have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC’S longer-run inflation goal,” Powell said, referring to the policy-setting Federal Open Market Committee.
“We are monitoring the situation very carefully, and we are committed to price stability,” Powell said. He added that “if we were to see that inflation were remaining high and remaining materially higher above our target for a period of time — and that it was threatening to uproot inflation expectations and create a risk of a longer period of infla
tion — then we would absolutely change our policy as appropriate.”
For now, the Fed chair voiced comfort with the central bank’s relatively patient policy path even in light of the hotter-than-expected price data. He said that the labor market was improving but that “there is still a long way to go.” He also said the Fed’s goal of achieving “substantial further progress” toward its economic goals before taking the first steps toward a more normal policy setting “is still a ways off.”
Fed officials are debating when and how to slow their $120 billion of monthly government-backed bond purchases, which would be the first step in moving policy away from an emergency mode. Powell said those discussions will continue “in coming meetings.”
The central bank is also keeping its policy interest rate near zero, which helps borrowing remain cheap for consumers and businesses. Officials have set out a higher standard for lifting that rate from rock bottom: They want the economy to return to full employment and inflation to be on track to average 2% over time.
The Fed’s guidance states that officials want to see inflation “moderately” above 2% for a time, and Powell was asked what that standard meant when price pressures were so strong.
“Inflation is not moderately above 2%; it’s well above 2%,”
Powell said of the current data. “The question will be, where does this leave us in six months or so — when inflation, as we expect, does move down — how will the guidance work? And it will depend on the path of the economy.”
Raising rates is not yet up for discussion, officials have said publicly and privately. The bulk of the Fed’s policy-setting committee does not expect to lift borrowing costs until 2023, based on its latest economic projections.
Given Powell’s comments, that watchful stance is unlikely to shift, economists said.
“We still don’t think higher inflation will result in a quicker policy tightening,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in response to Powell’s prepared testimony. “Asset purchases probably won’t start to be tapered until next year, with interest rates not raised until the first half of 2023.”
The Fed is weighing the risks of higher inflation against the huge number of people who remain out of work. Congress has tasked the central bank with fostering both stable prices and maximum employment. While price pressures have picked up markedly, there are still 6.8 million fewer jobs than there were in February 2020, the month before pandemic layoffs started in earnest.
That so many people remain out of work is something of a surprise, because employers report widespread labor shortages, and wage increases and signing bonuses abound as they try to lure talent.
“Labor shortages were often cited as a reason firms could not staff at desired levels,” according to the Fed’s latest “Beige Book” of anecdotal economic reports from business contacts across its 12 districts. “All districts noted an increased use of nonwage cash incentives to attract and retain workers.”
Powell said he expected people to return to work as health concerns abated and other issues keeping people sidelined faded, and he predicted that “job gains should be strong in coming months.”