Powell Downplays Inflation Fears But Admits Uncertainty

Federal Reserve Chairman Jerome Powell downplayed inflation fears yet again, saying it won’t rise to 1970s levels. However, he did acknowledge significant uncertainty in the economy as the nation continues to reopen.

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Inflation Fears

The Fed did anticipate that the pandemic’s slowdown will temporarily push prices up and generate inflation fears. However, Powell said that the price increases were larger than they expected.

In addition, the current inflation seems more persistent than anticipated. At the same time, Powell remained insistent that the shortages causing the inflation will fade over time. This means that inflation rates should go down and stay closer to the Fed’s 2% target. 

“If you look behind the headline and look at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening,” Powell said in a hearing before a House subcommittee. “That’s something that we’ll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process.”

Feds Adjust Inflation Forecast

Last week, Fed officials adjusted their median forecast for inflation this year. Instead of the previous 2.4% forecast, the central bank is now projecting a fourth-quarter rise in consumer prices by 3.4%.

The Fed adjusted the rates after a series of high inflation readings. The high rates pushed the consumer-price index 12-month gain to 5% in May. In fact, this now stands the highest inflation rate since 2008.

Powell said that while he maintains “a level of confidence” in the prediction that inflation will start to subside, he expressed doubts on determining the timing.

Still, the Fed voted to maintain short-term rates near zero, which remains in effect since March 2020. They also voted to continue buying $120 billion of Treasury and mortgage bonds each month until the economy heals further.

Tightening Policy To Combat Inflation Fears

Powell reiterated that if necessary, the Fed will tighten policy to control inflation. During last Tuesday’s hearing, the topic should have centered on lessons learned by the Fed.

Instead, lawmakers from both sides hammered on  Powell to give the outlook for inflation.“When Congress spends trillions of dollars and the Fed prints money, something’s got to give,” said Representative Mark Green (R-TN).

Specifically, he asked Powell if the recent price increases are “the start of something that could be as bad as the ‘70s”. This referred to the 1970s when inflation in the US hit double digits. 

Powell assured lawmakers that a similar inflation rate as the 70s is highly unlikely. In particular, he said that the Federal Reserve has tools to keep inflation around 2%. ‘We’re digging out of a very deep hole.

We’ve made a lot of progress but…we have a long way to go,” Powell added. Meanwhile, Representative Carolyn Maloney (D-NY) expressed concern that the Fed might raise rates too early and hamstring the economic recovery.

“I strongly believe that the recent spike in inflation will only be temporary, and that shouldn’t cause the Fed to raise interest rates too soon,” she said.

Interest Rates Will Rise Sooner Than Expected

Fed officers indicated last week they now expect to raise interest rates sooner than planned. Before, they gave projections of rate increases by 2024 at the earliest.

Now, officials are looking to raise interest rates by half a percentage point by the end of 2023. Previous fed forecasts show they originally planned to maintain near-zero rates throughout 2023. 

In addition, officials are also discussing if they need to scale down on bond purchases. For now, they will continue buying bonds at the current pace until the economy progresses more.

The rate of success on how well the US completes the goals of full employment amid a 2% inflation background. However, many analysts see a scaling down of bond purchases later this year. 

Despite Inflation Fears, US Making Faster Recovery

Despite inflation fears, the US economic recovery progress is faster than anticipated. Increased vaccination rates, declining COVID-19 cases, and trillions of dollars dumped into the market are easing the transition from the pandemic to normalization. In fact, total economic output is on track to surpass pre-pandemic levels within this quarter.

Watch the Forbes Breaking News video where Rep. Steve Scalise (R-LA) Asks Federal Reserve Chairman Jerome Powell ‘Is 5% Inflation Acceptable To You?'

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What do you think of Powell’s assurance that the US won’t experience inflation levels at par during the 1970s? Do you think that’s a good sign? In addition, do you expect Powell to get his assessment right?

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