Powell says Fed ready to intervene if US inflation spirals out of control

Jay Powell, the chair of the Federal Reserve, said the US central bank was ready to intervene if inflation spiralled out of control, but stressed that he expected price increases to ease later in the year.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell told the House of Representatives financial services committee during a hearing on Wednesday.

He added that the Fed “would be prepared to adjust the stance of monetary policy as appropriate if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal”.

Powell’s comments came in the wake of data showing the US consumer price index rose 5.4 per cent in June compared with a year ago, which revived concerns that the US economy may be overheating.

The figures could raise pressure on the US central bank to more rapidly begin the process of slowing the large doses of monetary support it delivered to the economy during the pandemic, starting with a reduction of the $120bn in monthly asset purchases.

Although Powell noted the higher inflation figures and insisted the Fed would not be complacent about rising prices, he stuck to his view that the inflation surge was largely temporary, which is shared by many central bank officials.

“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,” Powell said.

“In addition, 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.

“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,” he added.

During the hearing, top Republicans on the panel pressed Powell to explain the Fed’s position on inflation. Republicans are increasingly criticising the White House and Democrats for fuelling rising inflation and higher living costs due to the $1.9tn stimulus legislation passed in March.

Some have also accused the Fed of being complacent in the face of higher prices, calling for the rapid removal of monetary stimulus.

In one pointed criticism, Ann Wagner, a Missouri Republican, said families and businesses in her district were not feeling that inflation was “very temporary”. Powell replied that price spikes were coming from a “small group” of goods and services tied to economic reopening, but the Fed was “monitoring the situation very carefully”.

Fed officials are wary of moving too quickly to pull back their support for the US economy. The US labour market is still far short of its pre-pandemic employment levels, and fallout from the coronavirus crisis on a global scale could still pose risks for the American economy.

During its June meeting, the Fed launched a debate about the timing and conditions of trimming its asset purchases, but Powell suggested a decision was not imminent. The Federal Open Market Committee said it would need to see “substantial further progress” compared to last December on its full employment and price stability goals to start dialling back the stimulus.

“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” the Fed chair said in his prepared remarks. “We will continue these discussions in coming meetings. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”

Powell also suggested that while inflation was now well above the Fed’s average 2 per cent target, central bankers would have a better picture of the dynamic by the end of the year in order to assess policy. “The question will be, where does this leave us in six months or so when inflation as we expect does move down,” he said.

US government debt extended its rally as Powell testified, with the yield on the benchmark 10-year Treasury note trading 0.05 percentage points lower on the day to 1.36 per cent. The yield on the ultra-long 30-year bond dropped almost 0.06 points to below 2 per cent. 

Short-dated Treasuries, which are more sensitive to policy adjustments, also gained. Yields on the two-year note slipped almost 0.03 points to 0.23 per cent. US stocks, meanwhile, eked out gains in afternoon trading. The S&P 500 edged up 0.1 per cent.

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