Federal Reserve Chair to Testify Before Congress
Jerome H. Powell told Senators that price gains should fade but Fed thinks about them “night and day.”
The Fed chair acknowledges inflation anxiety as he testifies before Congress.
Jerome Powell, center, has attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, Credit…Luca Bruno/Associated Press
July 15, 2021, 7:10 a.m. ET
Jerome H. Powell, the Federal Reserve chair, acknowledged 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 ties back to then country’s reopening from the pandemic, and pointed out that there would be big costs to overreacting to temporary inflation at a time when millions remain out of work.
“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 during a Senate Banking Committee hearing on Thursday. “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’s testimony comes at a politically and economically fraught moment, as prices for used cars, rent, restaurant meals and other items rise 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 earlier 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.
The Fed chair was asked about rising inflation repeatedly during testimony on Wednesday before the House Financial Services Committee, and that continued into Thursday. Patrick J. Toomey, the top Republican on the Senate Banking Committee, was among those who questioned the Fed’s super-supportive monetary policies and raised concerns about inflation.
Mr. Powell has maintained that fast price gains are likely to moderate with time, and has attributed rapid pickup to factors tied to the economy’s reopening from the pandemic — a message he reiterated during his testimonies this week. He indicated in response to questioning on Wednesday that Fed officials expected inflation to begin calming in six months or so, and on Thursday he pointed out that the gains are tied to just a few pandemic-impacted categories, rather than being broad. But he also made clear that the Fed is 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 “night and day.”
He noted that there are risks to overreacting to temporary inflation at a time when millions of people remain out of work, since changes to the Fed’s policies could interrupt the economy’s rebound before the return to work is complete.
“To the extent that it is temporary, then it wouldn’t be appropriate to react to it,” he 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.”
For now, longer-term inflation expectations have remained in control, and the Fed is hoping to see more labor market progress before pulling back its monetary policy support. Those policies include both $120 billion in monthly government-backed bond purchases and rock-bottom interest rates.
“We’re noting that there’s still an elevated level of unemployment,” Mr. Powell said when asked why those policies remained in place.
But the Fed is actively discussing when and how to slow its bond purchases, he said. Economists expect that they could begin to do so later this year or early next. Some officials want to slow the Fed’s mortgage-backed bond buying faster than their Treasury bond purchases, worried that the buying is overheating the housing market.
Mr. Powell said the purchases overall are contributing to the housing market’s strength, and mortgage-backed securities are “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 would move faster if necessary.
“We’re humble about what we understand,” Mr. Powell said on Thursday.