Federal Reserve Expects Inflation to Ease, Says Jerome Powell

Washington, DC, July 15, 2021-“Federal Reserve Chairman Jerome Powell said the central bank wouldn’t hesitate to raise interest rates to keep inflation under control but repeatedly emphasized he still expects price pressures to ease later this year,” reports the Wall Street Journal.

While Powell believes that inflation is temporary, he reports that the Fed will raise interest ways if it persists.

“Inflation ‘has been higher than we’ve expected and a little bit more persistent,’ Mr. Powell said in a semiannual report Wednesday to House lawmakers. His appearance came a day after the government reported the fastest monthly rise in consumer prices in 13 years, largely because of special factors including a semiconductor shortage that is reducing the supply of autos.

“Pandemic-related bottlenecks and other supply constraints created ‘just the perfect storm of high demand and low supply’ that led to rapid price increases for certain goods and services, he said. Higher inflation readings ‘should partially reverse as the effects of the bottlenecks unwind.’

“While Mr. Powell’s remarks amounted to a reaffirmation of his view that inflation is likely to be temporary, even in light of Tuesday’s report, he acknowledged more explicitly that the Fed could turn out to be wrong in its inflation forecasts. ‘We’re anxious, like everybody else, to see that inflation pass through,’ he said.

“Mr. Powell also indicated he wasn’t in a hurry to start paring the Fed’s monthly purchases of $120 billion in Treasury or mortgage securities. Several Fed bank presidents have indicated they are eager to start shrinking those purchases. Other senior Fed officials have suggested the central bank shouldn’t be in a rush.

“‘We’ll have another round of discussions on this very topic’ at the Fed’s meeting in two weeks, he said, during a three-hour hearing in which he was repeatedly grilled by lawmakers. Mr. Powell didn’t suggest that any decisions are imminent.

“The Fed has held interest rates near zero since the coronavirus pandemic hit the U.S. economy in March 2020. The central bank has said it expects to keep rates there until it is confident inflation will hold at its 2% target and the labor market has healed, or returned to what it calls ‘maximum employment.’”

“Mr. Powell said it would be a blunder to raise interest rates to address one-time increases in the prices of certain services, like air travel and hotel rates, or goods, like new and used cars, that have surged due to the reopening of the economy.

“‘Honestly, it would be a mistake to do it at a time when virtually all forecasters believe that these things will come down on their own accord,’ Mr. Powell said. ‘It would be a mistake to act prematurely.’

“There could come a point when ‘the risks may flip,’ he said.

“If inflation stayed too high or began to seep into consumers’ and businesses’ expectations of future inflation, which can be self-fulfilling, then the Fed would raise rates. ‘People need to have faith in the central bank that we will do that,’ Mr. Powell added.”