WASHINGTON (REUTERS) – US monetary policy will offer “powerful support” to the economy “until the recovery is complete,” Federal Reserve chairman Jerome Powell said on Wednesday (July 14) in remarks that portrayed a recent jump in inflation as temporary and focused on the need for continued job gains.
Any move to pull back support for the economy, by first slowing the US central bank’s US$120 billion in monthly bond purchases, is “still a ways off,” Powell said in a hearing before the US House of Representatives Financial Services Committee.
Despite recent job gains “there is still a long way to go” in pulling millions of people from the sidelines, many of them lower-wage, Black or Hispanic workers hit hardest by the recession triggered by the coronavirus pandemic, Powell said.
Powell addressed concerns that inflation posed new risks of its own, saying the pace of price increases was faster than expected but would be “moderating,” language that indicated he saw no need to rush the shift towards post-pandemic policy.
Representative Ann Wagner, a Republican from Missouri, challenged that conclusion, relaying what’s likely to be a common refrain from lawmakers: some of their constituents are getting worried.
At a prior hearing in February “you reiterated that price spikes were temporary. I can tell you that the families and businesses I represent are not feeling that these price spikes are temporary,” she said.
“The incoming data have been higher than expected and hoped for but are still consistent” with a temporary bout of higher prices, Powell responded.
“It is housing, appliances, food prices, gas,” Wagner retorted, a sign of what could become growing political pressure on the Fed to get tougher on inflation if the spikes in prices continue.
US Treasury yields fell after the release of Powell’s prepared testimony earlier on Wednesday and remained lower even though prices of factory inputs rose at a higher-than-expected pace in June, an indication markets construed his comments as a sign the monetary taps will stay open.
Powell’s remarks were notable as well for excluding any mention of risks to the recovery from the coronavirus Delta variant, with the Fed chief saying the central bank expects strong upcoming job gains “as public health conditions continue to improve.”
Faster-than-anticipated inflation and a new rise in coronavirus infections due to the Delta variant pose a potential dilemma for Powell, pulling the outlook for policy in opposite directions.
The Fed’s June meeting saw officials begin a move towards post-pandemic policy, with some of them poised to tighten financial conditions sooner to ensure inflation remains contained.
Renewed coronavirus-related risks, if they materialise, could push the Fed in the other direction of keeping support for the recovery in place longer in case household and business spending wane amid a rise in new infections.
Falling Treasury bond yields have indicated concern among investors about slowing US economic growth, even as new data on prices this week showed consumers paying appreciably more for an array of goods and services, including appliances, fabric, beef and rent.
In a report to Congress last week, the Fed said that as the “extraordinary circumstances” of the reopening subside, “supply and demand should become better aligned, and inflation is widely expected to move down.”
Rising Delta variant
While each month of high inflation makes it harder to stick to that conviction, Powell for now is keeping to the Fed’s core narrative of a job market that still needs massive help from the central bank to restore it to its pre-pandemic health and minimise the long-term damage from a historic, virus-driven calamity.
The Fed has said it will not reduce its bond-buying programme absent “substantial further progress” in regaining the roughly 7.5 million jobs still missing since the onset of the pandemic in March 2020, a threshold policymakers feel will likely be met later this year.
That hinges, however, on continued reopening of the economy, recovery in the travel, leisure and other “social” industries devastated by the health crisis, and the willingness of currently unemployed or homebound individuals to fill the record number of jobs on offer.
When Powell last spoke about the economy at a news briefing after the end of the June 15-16 policy meeting, new daily coronavirus infections were falling toward recent lows, and the Fed dropped language from its policy statement that the pandemic “continues to weigh on the economy.”
Since then the Delta variant has pushed the seven-day moving average of cases from 11,000 to above 21,000, and health officials are concerned about the spread of the variant in parts of the country where vaccination rates are low. The numbers are more ominous globally.
Powell is scheduled to appear before the US Senate Banking Committee at 9.30am on Thursday (9.30pm Singapore time).