Jay Powell says Fed is ready to step in if US inflation gets out of hand

Jay Powell, Chairman of the Federal Reserve, said the US central bank was ready to step in if inflation got out of hand, but stressed that he expected price hikes to subside later in the day. ‘year.

“Inflation has risen dramatically and will likely remain high for the next few months before moderating,” Powell told the House of Representatives financial services committee at a hearing Wednesday.

He added that the Fed “would be ready to adjust the stance of monetary policy as appropriate if we saw any signs that the inflation path or long-term inflation expectations were moving significantly and persistently. beyond the levels compatible with our objective “.

Powell’s comments follow data showing that the U.S. Consumer Price Index rose 5.4% in June from a year ago, which rekindled concerns about the overheating of the American economy.

The numbers could increase pressure on the US central bank to begin the process of slowing down the large doses of monetary support it provided to the economy during the pandemic more quickly, starting with a $ 120 billion cut. dollars in monthly asset purchases.

Although Powell noted the higher inflation figures and insisted that the Fed would not be complacent about rising prices, he maintained his view that the inflation surge was big. temporary part, which is shared by many central bank officials.

“Inflation is temporarily boosted by base effects, as the sharp price declines related to the pandemic since last spring get out of the 12-month calculation,” said Powell.

“In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has resulted in particularly rapid price increases for some goods and services, which are expected to reverse. partially as the effects of bottlenecks dissipate.

“The prices of services which have been hit hard by the pandemic have also jumped in recent months as demand for these services has increased as the economy reopens,” he added.

During the hearing, the main Republicans on the panel urged Powell to explain the Fed’s stance on inflation. Republicans are increasingly criticizing the White House and Democrats for fueling rising inflation and rising costs of living due to $ 1.9 billion stimulus legislation passed in March.

Some have also accused the Fed of being complacent about rising prices, calling for the swift removal of monetary stimulus.

In a pointed criticism, Ann Wagner, a Republican from Missouri, said families and businesses in her district did not think inflation was “very temporary.” Powell replied that the price spikes came from a “small group” of goods and services related to the economic reopening, but the Fed “was monitoring the situation very closely.”

Fed officials are reluctant to act too quickly to withdraw support for the US economy. The U.S. labor market is still far from its pre-pandemic employment levels, and the fallout from the global coronavirus crisis could still pose risks to the U.S. economy.

At its June meeting, the Fed launched a debate on the timing and terms of reducing its asset purchases, but Powell suggested a move was not imminent. The Federal Open Market Committee said it would need “further substantial progress” from last December on its full employment and price stability goals to start slowing the recovery.

“While still a long way from meeting the ‘substantial further progress’ standard, participants expect progress to continue,” the Fed chairman said in his prepared remarks. “We will continue these discussions at future meetings. As we said, we will notify you in advance before we announce any decision to make any changes to our purchases. “

Powell also suggested that even if inflation was now well above the Fed’s average 2% target, central bankers would have a better idea of ​​the momentum by year-end in order to assess the Politics. “The question will be where does that leave us in about six months or so when inflation, as we hope, goes down,” he said.

US government debt continued its rally, as witnessed by Powell, with the benchmark 10-year Treasury bond yield trading 0.05 percentage points down that day to 1.36% . The yield on the ultra-long 30-year bond fell almost 0.06 points to less than 2%.

Short-term Treasuries, which are more sensitive to policy adjustments, also gained. Yields on the two-year note slipped nearly 0.03 points to 0.23 percent. US stocks, meanwhile, made gains in afternoon trading. The S&P 500 rose 0.1%.