Powell: Fed may quicken reduction of bond buys

Chair also acknowledges high inflation expected to persist well into 2022

WASHINGTON — Chair Jerome Powell said Tuesday that the Federal Reserve will consider acting more quickly to dial back its ultra-low-interest rate policies to counter higher inflation, which Powell acknowledged will likely persist well into next year.

Treasury Secretary Janet Yellen also testified before the Senate Banking panel and urged Congress to raise the nation’s borrowing limit. Yellen has previously warned that without a hike in the debt ceiling, the U.S. government could default on its debt obligations for the first time soon after Dec. 15.

“America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery,” Yellen said.

Congress is expected to address the borrowing limit and also faces a Friday deadline to provide enough funding to keep the federal government open.

The Fed has begun reducing its monthly bond purchases, which are intended to lower longer-term borrowing costs, at a pace that would end those purchases in June. But Powell made clear that Fed officials will discuss paring those purchases more quickly when it next meets in mid-December.

Doing so would put the Fed on a path to begin raising its key short-term rate as early as the first half of next year. A higher Fed rate would, in turn, raise borrowing costs for mortgages, credit cards and some business loans.

“The economy is very strong and inflationary pressures are high,” Powell said at a Senate Banking Committee hearing. “It is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner.”

Powell said the Fed should know more about the potential economic impact of the omicron variant of the coronavirus in time for that next meeting. But he suggested that for now, omicron hasn’t been factored into the Fed’s economic outlook.

The emergence of a potentially dangerous new COVID-19 variant could make Powell’s job harder and more complicated next year. If omicron leads to another wave of factory and port shutdowns in the United States and overseas and to a reversal of the back-to-office return for many workers, Americans might keep spending heavily on goods such as furniture, appliances and cars. That trend would likely worsen supply bottlenecks and raise prices even more.

At the same time, the variant could renew fears among many workers about becoming infected on the job. More resignations might then follow at a time when the rate of job quitting is at record highs. This would risk weakening the job market and the economy. Under such a scenario, the Fed’s dual mandates of stable prices and maximum employment could come into conflict.

Under fire from some Senate Republicans about worsening consumer inflation, which reached a three-decade high last month, Powell acknowledged that price increases have been worse than the Fed expected and will last longer than the policymakers initially thought. As a result, he said, the term “transitory” no longer works.