Fed’s Powell continues to work out a job recovery plan, nervous about inflation Reuters

Howard Schneider

WASHINGTON (Reuters)-Federal Reserve Chairman Jerome Powell pledged on Wednesday to “strongly support” the recovery of the US economy from the coronavirus pandemic, but faced sharp questions from Republican lawmakers about the recent surge in inflation.

Powell testified to the U.S. House of Representatives Financial Services Committee that he believes that the recent price increase is related to the country’s reopening after the pandemic and will subside, and that the Fed should continue to focus on getting as many people back to work as possible.

Powell stated that any move to reduce support for the economy by first slowing down the Fed’s $120 billion monthly bond purchases “still has a long way to go,” because the millions of people who worked before the crisis will still be affected. Pull back the labor force.

“The high inflation data is for a small number of goods and services that are directly related to the reopening,” Powell testified, which shows that he believes there is no need to rush to post-pandemic policies.

Rep. Ann Wagner, a Republican from Missouri, questioned this conclusion, saying that as long as inflation continues to rise, legislators may exercise restraint: their voters are increasingly worried.

At a hearing in February, “You reiterated that the price surge is temporary. I can tell you that the households and businesses I represent do not think these price increases are temporary,” Wagner said.

Powell responded that “the incoming data is higher than expected and hopeful, but it is still consistent with the temporary price increase.”

“It’s housing, home appliances, food prices, natural gas,” Wagner retorted, indicating that if prices continue to soar, the Fed may face increasing political pressure to require it to take tougher measures against inflation.

Republican Rep. Anthony Gonzalez from Ohio aimed at a new Fed framework that aims to encourage higher inflation by “moderately” higher than the central bank’s 2% target for “a period of time” Employment

“How long is’a period of time’?” Gonzalez asked, arguing that while employers have posted record numbers of jobs, the Fed’s current policy may not help encourage employment.

“It depends on the situation,” Powell said, which shows that if prices continue to rise, he will face a dilemma. “The current inflation rate is well above 2%…. The question for the (Federal Open Market) Committee will be what this will bring us in six months.”

U.S. Treasury yields fell after Powell’s prepared testimony was announced earlier on Wednesday. Although factory input prices rose faster than expected in June, they still fell. This shows that the market sees his remarks as a currency faucet that will remain open. sign.

Powell’s speech is also worth noting because he did not mention the risk of recovery from the Delta variant of the coronavirus. The Fed Chairman said that as the public health situation continues to improve, the Fed expects strong employment growth.

At the Fed’s June meeting, officials began to shift to post-pandemic policies, and some of them prepared to tighten financial conditions as soon as possible to ensure that inflation remains manageable. If the risks associated with the new crown virus emerge again, it may push the Fed in the other direction, which is to maintain support for the recovery for a longer period of time as household and business spending decreases as new infections increase.

The decline in Treasury yields shows investors’ concerns about the slowdown in US economic growth, although this week’s new price data shows that consumers are paying significantly more for a range of goods and services, including home appliances, fabrics, beef and rent.

In a report to Congress last week, the Fed stated that as the “exceptional circumstances” of reopening subsided, “supply and demand should be better coordinated, and inflation is generally expected to fall.”

Chart: Yields, long-term inflation outlook decline: https://graphics.reuters.com/USA-FED/HEARING/jznvnyabkpl/chart_eikon.jpg

Rising delta

Although high inflation every month makes it more difficult for people to adhere to this belief, Powell still adheres to the Fed’s core narrative that the job market still needs a lot of help from the central bank to restore its pre-pandemic health and minimize it. Long-term damage caused by historical disasters driven by viruses.

The Fed has stated that if there is no “substantial further progress” in restoring the approximately 7.5 million jobs that have been missing since the beginning of the pandemic in March 2020, it will not reduce its bond purchase plan, and policymakers believe this threshold may be It will be reached later this year.

However, this depends on the continued reopening of the economy, the recovery of tourism, leisure and other “social” industries damaged by the health crisis, and whether currently unemployed or homeless individuals are willing to fill record jobs.

When Powell talked about the economy for the last time at a press conference after the end of the policy meeting on June 15-16, the new daily coronavirus infections were falling to recent lows. The phrase “continue to put pressure on the economy” is popular in the economy. “

Since then, the Delta variant has pushed the 7-day moving average of cases from 11,000 to more than 21,000, and health officials are concerned about the spread of the variant in areas with low vaccination rates in the country. These numbers are even more ominous on a global scale.

Powell is scheduled to attend the US Senate Banking Committee at 9:30 a.m. (1330 GMT) on Thursday.