Fed Chair Says Inflation Now Likely To ‘Linger Well Into Next Year’
November 30, 2021—After months of downplaying inflation as a temporary condition, U.S. Federal Reserve Board Chair Jerome Powell said inflation has now spread much more widely beyond the sectors impacted by supply chain bottlenecks.
‘Transitory’ No More
“I think it’s probably a good time to retire that word and explain what we mean,” Powell told senators at a Banking Committee hearing.
Surging Economic Growth
The U.S. economy is now growing at 5 percent, which is the “fastest pace in many years,” Powell said. Meanwhile, the unemployment rate is down to 4.6 percent. Asked by Sen. Jack Reed, D-R.I., about the drop in the U.S. labor participation rate, Powell said fears about the pandemic are the likely cause.
Changes To The Initial Inflation Projections
Initially, central bankers said supply chain issues caused spikes in inflation and would subside. Today, however, price increases have “spread much more” widely to other economic sectors, Powell said. Furthermore, with wages now rising “at a brisk pace,” the risk of higher inflation increases.
“It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace. We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation.”
More Tapering And Sooner
The Federal Reserve is likely to decide to taper faster, meaning it will buy fewer U.S. bonds. Its next meeting is scheduled for Dec. 14-15. Powell indicated that the board would look at inflation figures, employment figures as well as news about the COVID-19 variants. However, he suggested the virus is a “risk factor,” rather than a component that would impact the Fed’s decision.
No Word On Changes To Interest Rates
While Powell indicated the central bank would use the tools it has available, he did not suggest the Fed would be making changes to its policy on interest rates. Like its contemporaries in continental Europe and the United Kingdom, the Federal Reserve left interest rates near zero percent when it last met.
Lawmakers on both sides of the aisle questioned the loose monetary stance in light of the economic resurgence and inflation.
“The Fed is adding fuel to the inflationary fire,” Sen. Pat Toomey, R-Pa., complained.
Meanwhile, Sen. Mark Warner, D-Va., suggested more the Fed do more to unwind its aggressive policies sooner. “I do hope you will move more aggressively on this tapering,” Warner said.
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