Powell’s inflation optimism fades

Slowing prices forecast in ’22, but not a sure thing, he says

WASHINGTON — In a fresh sign of his growing concerns about inflation, Chairman Jerome Powell said Wednesday that the Federal Reserve can’t be sure that price increases will slow in the second half of next year as many economists expect.

Powell told the House Financial Services Committee that most economists regard the current price spikes, which have sent consumer inflation to a three-decade high, as largely a response to the pandemic’s persistent disruptions to supply and demand. As Americans have spent more time at home, they have ramped up spending on furniture, appliances and laptop computers. Soaring demand for such goods, combined with parts shortages, have resulted in supply chain snarls and higher prices.

In the past, Powell, who was nominated last week to a second four-year term by President Joe Biden, has frequently expressed his belief that these supply-and-demand imbalances should fade as the pandemic eases, which would reduce inflation. But on Wednesday, he said that while such an outcome is “likely,” it is only a forecast.

“The point is, we can’t act as if we’re sure of that,” he said. “We’re not at all sure of that. Inflation has been more persistent and higher than we’ve expected.”

At the same hearing Wednesday, Treasury Secretary Janet Yellen clashed with many committee Republicans, who charged that excess spending by the Biden administration has been a major contributor to high inflation. The administration’s proposed $2 trillion social and environmental spending bill, they further argued, would further accelerate inflation.

“It is the multiple trillions of dollars that this Congress and this administration is spending that is putting jet fuel on the

fires of this economy,” said Rep. Patrick McHenry from North Carolina, the senior Republican on the committee. “It is making things worse.”

Yellen countered that the new spending would occur over a decade and would be paid for, which would reduce its inflationary impact. She also argued that the administration’s proposals to spend more on child care subsidies, universal early child care education and the child tax credit would make it easier for many women to return to work after having children. Their return, Yellen said, would help address the labor shortages that are contributing to higher inflation.

The Treasury secretary also defended the administration’s $1.9 trillion financial relief package, approved last March, and said that “at most,” it was a “small contributor” to higher prices, which she said were mostly caused by supply chain bottlenecks.

The financial relief bill “put money in people’s pockets, helped to meet expenses that they had and contributed to strong demand in the U.S. economy,” Yellen said.

Powell’s latest remarks came a day after he signaled a sharp turn toward tightening credit more quickly than the Fed has previously indicated. The Fed chairman said Tuesday that it would be “appropriate” for the central bank to consider accelerating the reduction of its bond purchases at its next meeting in mid-December. That step would pave the way to the Fed raising its benchmark interest rate as early as next spring.

Stock prices tumbled Wednesday after Powell’s comments. Low interest rates have been a key driver sending the stock market to record highs during the pandemic. Shares recovered most of those losses in midday trading Wednesday.

WAGES AND INFLATION

Powell also downplayed sharp wage gains this year as something that could increase inflation further, suggesting that he doesn’t yet see a wage price spiral developing.

In the 1970s, as prices rose steadily, workers were able to demand higher pay to keep up with greater costs. Yet businesses then raised prices further to cover the higher wages, extending the worst run of inflation since World War II.

“We like to see wages move up,” Powell said. “At this point, we don’t see them moving up at a troubling rate that would tend to spark higher inflation, but that’s something we’re watching very carefully.”

On Tuesday, Powell said he was ready to “retire” the use of the word “transitory” to describe inflation. Instead, he said the “risk of higher inflation has increased.”

Powell on Tuesday also elevated inflation-fighting to a more urgent priority than supporting job growth by noting that higher prices themselves threaten the economic recovery. A long period of growth, he said, is needed to regain the “great labor market” that existed before the pandemic.

“We’ve seen inflation be more persistent. We’ve seen the factors that are causing higher inflation to be more persistent,” Powell told the House Financial Services Committee on Wednesday. “Policy has adapted to that and will continue to adapt.”

The U.S. central bank is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November to slow buying by $15 billion a month. The next gathering of the policysetting Federal Open Market Committee is Dec. 14-15, when they could make a decision to accelerate the tapering.

Powell said the taper had not been a disruptive event so far in financial markets and he didn’t expect it would become one because the Fed has “telegraphed it.”