Powell renews forecast for inflation
Fed chief says US economy growing rapidly
WASHINGTON (AP) — The economy is growing at a healthy clip, and that has accelerated inflation, Federal Reserve Chair Jerome Powell says in written testimony to be delivered Tuesday at a congressional oversight hearing.
Still, Powell reiterated his view that inflation’s recent jump to a 13-year high would prove temporary.
“Inflation has increased notably in recent months,” Powell said in the prepared remarks. He blamed the rise on several factors, including sharp price declines last year at the onset of the pandemic, which make inflation figures now, compared with a year ago, look much larger. Higher gas prices, and rapid increases in consumer spending as the economy reopens, coupled with supply bottlenecks, have also contributed to rising costs.
“As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” Powell said, referring to the 2 percent inflation rate the Fed typically targets. Currently, however, the Fed is seeking to push inflation slightly above 2 percent to make up for the roughly nine years that it has come in below that level.
Powell’s remarks follow a meeting
of the Fed’s policymaking committee last week, when central bank officials signaled they now may increase the Fed’s benchmark interest rate twice in 2023. That’s earlier than the time frame they set out in March, when no rate hike was expected until after 2023.
Powell also said the Fed had formally begun discussing when and how the central bank might reduce the current $120 billion a month of Treasurys and mortgage-backed bonds that the Fed is purchasing each month.
Both moves were seen as evidence that the Fed wanted to signal it was prepared to keep inflation in check
without initially taking any steps to pull back on its efforts to stimulate the economy.
Powell will testify Tuesday before a congressional oversight panel about the Fed’s unprecedented steps last year to provide extraordinary support to financial markets at the outset of the pandemic, including the first purchases of corporate bonds in the Fed’s history.
‘Faster bond taper could keep options open on rate hike’
WASHINGTON (Reuters) — Two regional Federal Reserve officials said Monday that a faster withdrawal from the central bank’s bond purchase program could give it more leeway in deciding when to raise interest rates.
The discussion of how fast to end the Fed’s $120 billion monthly bond purchase program is only just beginning, but policymakers should keep in mind how it affects the debate that will follow it over interest rates.
“Creating optionality for the committee will be really useful and that will be part of the taper debate as we think about how much signaling we are doing about future rate policy,” St. Louis Fed president James Bullard said during a virtual event organized by the Official Monetary and Financial Institutions Forum and the Philadelphia Fed.
The policymakers highlighted some of the major questions Fed officials will have to grapple with as they work through an early test of the central bank’s new strategic framework at a time when inflation is coming in strong and the labor market recovery is weaker than expected.
Dallas Fed President Robert Kaplan noted the framework does not mention bond purchases, which were intended to lower interest rates and boost demand. Now that demand is up and many of the major factors limiting economic growth are linked to supply imbalances, “moderating that sooner than later” might give the Fed more flexibility over the rate discussion.