Fed “not at all sure” inflation will fade next year, Powell says

In a fresh sign of his growing concerns about inflation, Federal Reserve Chair Jerome Powell said Wednesday that the central bank can’t be sure that price increases will slow in the second half of next year as many economists expect.

Powell told the House Financial Services Committee that most economists regard the current price spikes, which have sent consumer inflation to a three-decade high, as largely a response to the pandemic’s persistent disruptions to supply and demand. As Americans have spent more time at home, they have ramped up spending on furniture, appliances, laptop computers. Soaring demand for such goods, combined with parts shortages, have resulted in supply chain snarls and higher prices.

In the past, Powell, who was nominated last week to a second four-year term by President Joe Biden, has frequently expressed his belief that these supply-and-demand imbalances should fade as the pandemic eases, which would reduce inflation. But on Wednesday, he said that while such an outcome is “likely,” it is only a forecast.

“The point is, we can’t act as if we’re sure of that,” he said. “We’re not at all sure of that. Inflation has been more persistent and higher than we’ve expected.”

At the same hearing Wednesday, Treasury Secretary Janet Yellen clashed with many committee Republicans, who charged that excess spending by the Biden administration has been a major contributor to high inflation. The administration’s proposed US$2 trillion social and environmental spending bill, they further argued, would further accelerate inflation.

“It is the multiple trillions of dollars that this Congress and this administration is spending that is putting jet fuel on the fires of this economy,” said Rep. Patrick McHenry from North Carolina, the senior Republican on the committee. “It is making things worse.”

Yellen countered that the new spending would occur over a decade and would be paid for, which would reduce its inflationary impact. She also argued that the administration’s proposals to spend more on child care subsidies, universal early child care education and the child tax credit would make it easier for many women to return to work after having children. Their return, Yellen said, would help address the labor shortages that are contributing to higher inflation.

The Treasury secretary also defended the administration’s US$1.9 trillion financial relief package, approved last March, and said that “at most,” it was a “small contributor” to higher prices, which she said were mostly due to supply chain bottlenecks.

The financial relief bill “put money in people’s pockets, helped to meet expenses that they had and contributed to strong demand in the U.S. economy,” Yellen said.

Powell’s latest remarks came a day after he signaled a sharp turn toward tightening credit more quickly than the Fed has previously indicated. The Fed chair said Tuesday that it would be “appropriate” for the central bank to consider accelerating the reduction of its bond purchases at its next meeting in mid-December. That step would pave the way to the Fed hiking its benchmark interest rate as early as next spring.

Stock prices tumbled after Powell’s comments. Low interest rates have been a key driver of the stock market to record highs during the pandemic. Shares recovered most of those losses in mid-day trading Wednesday.

Powell also downplayed sharp wage gains this year as something that could boost inflation further, suggesting that he doesn’t yet see a wage-price spiral developing. In the 1970s, as prices rose steadily, workers were able to demand higher pay to keep up with greater costs. Yet businesses then raised prices further to cover the higher wages, extending the worst run of inflation since World War II.

“We like to see wages move up,” Powell said. “At this point, we don’t see them moving up at a troubling rate that would that would tend to spark higher inflation, but that’s something we’re watching very carefully.”

On Tuesday, Powell said he was ready to “retire” the use of the word “transitory” to describe inflation. Instead, he said the “risk of higher inflation has increased.”

Powell also on Tuesday elevated inflation-fighting to a more urgent priority than supporting job growth by noting that higher prices themselves threaten the economic recovery. A long period of growth, he said, is needed to regain the “great labor market” that existed before the pandemic.

In a separate Associated Press news story about the Federal Reserve’s latest survey of business conditions around the country — referred to as its beige book report — Martin Crutsinger reported that the Fed’s 12 regional banks found that the economy continued to grow at a modest-to-moderate pace, and the outlook for future growth remains positive.

Yet, some of the Fed’s business contacts expressed uncertainty about when the problems presented by supply-chain bottlenecks and labor shortages might begin to ease. In part because of the supply chain problems, price increases were reported to be widespread across the economy.

The Fed survey was based on interviews with business contacts in November, in all 12 of the Fed’s regional bank districts, and it will form the basis for discussions when central bank officials hold their final meeting of the year on Dec. 14-15.

In congressional testimony this week, Federal Reserve Chairman Jerome Powell said the central bank is prepared to speed up the pace of the pullback of the easy-money policies it has been using to support the economy for the past 20 months.