WASHINGTON (AFP) – Inflation could rise higher and stay there longer than expected as the US economy recovers from the downturn caused by the Covid-19 pandemic, Federal Reserve chairman Jerome Powell said on Wednesday (July 28).
Inflation has already risen well above the Fed’s 2 per cent goal, mostly due to temporary factors including supply bottlenecks, Powell noted.
“The process of reopening the economy is unprecedented, as was the shutdown at the onset of the pandemic,” Powell told reporters at the conclusion of the two-day meeting of the central bank’s policy setting committee.
“As the reopening continues, other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect.”
The central bank chief’s comments came after the Federal Open Market Committee (FOMC) acknowledged the US economy is showing signs of progress, but said it would keep its lending rate at zero and continue its bond-buying programme, measures first introduced during last year’s sharp downturn.
Those easy money policies have been blamed by some analysts for fanning inflation, which has hit record levels in recent months.
The Fed has pledged to keep its interest rate lower for longer to help the economy achieve maximum employment, while aiming for inflation of 2 per cent over the longer term.
Powell reiterated his confidence that although inflation will remain high for some months it eventually will slow, but the central bank will be ready to act if needed.
“If inflation expectations were to move up, we would use our tools to guide inflation back down to 2 per cent,” Powell said.
“We think that some of it will fall away naturally as the process of reopening the economy moves through. It could take some time.”