Federal Reserve Chair Testifies Before Congress
Jerome H. Powell told senators that price gains should fade, but he made it clear that the Fed is watching them carefully.
‘Inflation Has Increased Notably,’ Fed Chief Says
The Federal Reserve chair, Jerome H. Powell, testified to the House on the effects of the coronavirus on the economy and issues surrounding inflation as the financial sector recovers.
As described in the monetary policy report, supply constraints have been restraining activity in some industries, most notably in the motor vehicle industry, where the worldwide shortage of semiconductors has sharply curtailed production so far this year. Conditions in the labor market have continued to improve, but there is still a long way to go. Labor demand appears to be very strong. Job openings are at a record high. Job gains should be strong in coming months as public health conditions continue to improve. And as some of the other pandemic-related factors currently weighing on them, weighing them down, diminish. As discussed in the monetary policy report, the pandemic-induced declines in employment last year were the largest for workers with lower wages and for African Americans and Hispanics. Despite substantial improvements for all racial and ethnic groups, the hardest hit groups still have the most ground left to regain. Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects as the sharp pandemic-related price declines from last spring drop out of the 12 month calculation.
The Federal Reserve chair, Jerome H. Powell, testified to the House on the effects of the coronavirus on the economy and issues surrounding inflation as the financial sector recovers.CreditCredit…Sarahbeth Maney/The New York Times
Jerome H. Powell, the Federal Reserve chair, acknowledged to senators on Thursday that inflation had risen to uncomfortably high levels and said he and his colleagues were watching price gains carefully.
But he maintained that the recent jump was tied to the country’s reopening from the pandemic and pointed out that overreacting to temporary inflation when millions remained out of work would come with significant costs.
“We’re experiencing a big uptick in inflation, bigger than many expected, bigger certainly than I expected, and we’re trying to understand whether it’s something that will pass through fairly quickly or whether, in fact, we need to act,” Mr. Powell said in response to questioning during a Senate Banking Committee hearing. “One way or another, we’re not going to be going into a period of high inflation for a long period of time, because of course we have tools to address that.”
Mr. Powell testified before House and Senate lawmakers this week as prices for used cars, rent, restaurant meals and other items are rising more rapidly — capturing headlines and eliciting criticism from Republicans. The Consumer Price Index jumped 5.4 percent in June from a year earlier, a report this week showed, 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.
“While they’ve seen a faster-than-expected rise in inflation, there is still compelling evidence that this is transitory,” said Michelle Meyer, head of U.S. economics at Bank of America. That was part of the message Mr. Powell was trying to emphasize, she said, while “trying to make clear that the Fed is not being irresponsible.”
The Fed chair was asked about rising inflation repeatedly during testimony on Wednesday before the House Financial Services Committee, and that continued into Thursday. Republicans in particular questioned the Fed’s super-supportive monetary policies, which include interest rates close to zero and large purchases of government-backed debt, and they raised concerns about inflation. Democrats largely played down the latest price numbers and focused instead on the number of workers who have still not rejoined the labor force.
Mr. Powell has maintained that fast price gains are likely to moderate with time, and he has attributed the rapid pickup to factors tied to the economy’s reopening — a message he reiterated this week. He pointed out that the gains were tied to just a few pandemic-affected categories, like automobiles and recovering leisure and hospitality industries, rather than being broad. But he also made clear that the Fed was monitoring the pop carefully.
“It’s not tied to the things that inflation is usually tied to — which is a tight labor market, a tight economy,” Mr. Powell said. “This is a shock going through the system associated with the reopening of the economy, and it’s driven inflation well above 2 percent, and of course we’re not comfortable with that.”
He said officials think about the higher inflation, and how they interpret it, “night and day.”
But he noted that there were risks to overreacting to temporary inflation when millions of people remained out of work, since changes to the Fed’s policies could interrupt the economy’s rebound before the return to work was complete.
“To the extent that it is temporary, then it wouldn’t be appropriate to react to it,” Mr. Powell said. “But to the extent that it gets longer and longer, we’ll have to continue to re-evaluate the risks that would affect inflation expectations.”
There are plenty of reasons to think the rapid increases will fade. Data quirks are making inflation data look artificially strong right now, and used car prices have jumped because strong demand for cars has run up against limited supply due to a semiconductor shortage. Pre-owned vehicles alone accounted for more than one-third of June’s big inflation reading.
At the same time, stickier price categories — like rent — have recently shown signs of moving higher.
But for now, longer-term inflation expectations have remained in control, which has given central bank policymakers confidence that they do not yet need to react.
“There’s good reason to think that a lot of these one-time price increases are going to revert,” Charles Evans, the president of the Federal Reserve Bank of Chicago, said at a separate event on Thursday. “I think we could be facing much less inflation in 2022 than many people think.”
The Fed has two main goals. It aims for stable price increases, which it defines as 2 percent annual gains on average using an inflation gauge called the Personal Consumption Expenditures index. That measure has moved up less than the Consumer Price Index, though it, too, is elevated, coming in at 3.9 percent in May. The Fed also tries to foster full employment.
That target remains far away: About 6.8 million jobs are still missing compared with before the pandemic, and Fed officials hope to see more labor market progress before pulling back on monetary policy supports. Those policies include both $120 billion in monthly government-backed bond purchases and rock-bottom interest rates.
“We’re in the process of evaluating when it will be appropriate for us to taper, which is to say reduce, our asset purchases,” Mr. Powell said Thursday. “There’s still a lot of unemployed people out there. We think it’s important for monetary policy to remain accommodative, and supportive of economic activity, for now.”
Economists expect that the Fed could begin to slow bond buying later this year or early next. Some officials want to slow the Fed’s mortgage-backed-bond buying faster than its Treasury bond purchases, worried that the buying is overheating the housing market.
Mr. Powell said that the purchases overall were contributing to the housing market’s strength, and that mortgage-backed securities were “contributing probably a little more than Treasury securities, but ultimately, it’s roughly the same order of magnitude.”
Rate increases are not yet under consideration, and most officials did not expect to raise borrowing costs from rock bottom before 2023, as of their June economic projections.
Mr. Powell has also been clear that the Fed will move faster if it proves necessary to keep longer-run inflation under wraps.
“We’re humble about what we understand,” he said on Thursday.