Fed chair: ‘Substantial further progress’ a ways off

Federal Reserve Chair Jerome Powell said the U.S. economic recovery still hasn’t progressed enough to begin scaling back the central bank’s massive monthly asset purchases, while adding that inflation is likely to remain high in coming months before moderating.

“At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December,” Powell said Wednesday in remarks before the House Financial Services Committee. “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”

At the House hearing, to present the Fed’s semi-annual Monetary Policy Report to Congress, Powell was pressed about how the central bank will judge it has reached that threshold.

“It’s very difficult to be precise about it,” Powell said of the goal of substantial further progress. “We will provide lots of notice as we go forward on that.”

The Fed chair will face more questions from the Senate banking panel on Thursday.

Powell “is trying to push back on this idea on that they are under pressure to exit or that they have decided to taper soon,” said Priya Misra, head of global rates strategy at TD Securities in New York. “He said the labor market has a long way to go.”

U.S. central bankers are providing aggressive support by holding interest rates near zero and buying $120 billion of bonds a month, even as the economy shows strong growth. Job gains have been solid and inflation has jumped, though officials say that’s due to temporary supply glitches as the economy reopens from the pandemic.

Ten-year Treasuries yields held around 1.37% as Powell testified and U.S. stocks fluctuated near all-time highs.

Critics say that ultra-easy monetary policy alongside massive government spending is overheating the economy. Stephen Stanley, chief economist at Amherst Pierpont Securities in New York, said the Fed policy committee is “in the middle of making a serious policy error.”

“The inflation crescendo is building everywhere except within” the Federal Open Market Committee, the Fed panel that sets interest rates, he wrote in a note to clients. “Companies across virtually all sectors of the economy are seeing sharp input cost increases and are passing them along with far more success than they have seen in decades.”

Government data released on Tuesday showed prices paid by U.S. consumers surged in June by the most since 2008 and were up 5.4% from the same month last year.

“Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind,” Powell said. “Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”

Powell noted that asset prices and risk appetite have risen while downplaying any nearterm risks to the economy from financial markets.

“Household balance sheets are, on average, quite strong, business leverage has been declining from high levels, and the institutions at the core of the financial system remain resilient,” he said.