Jerome H. Powell, Chairman of the Federal Reserve, signaled on Tuesday that the central bank is increasingly concerned about high – and stubborn – inflation and may accelerate its plan to withdraw economic support as it tries to squeeze out ensure that rapid price gains don’t become sustainable.
His comments, delivered at a Senate Banking Committee hearing, came at a difficult economic time for the Fed. Prices for food, shelter and other items are rising rapidly, millions of workers have yet to re-enter the workforce, and the virus continues to pose risks to the economic outlook, most recently with the new Omicron variant .
The Fed had bought $ 120 billion in government guaranteed securities each month during much of the pandemic to support the economy by keeping money flowing in financial markets. In November, officials announced plans to slow down those $ 15 billion a month purchases, which would end the program in mid-2022. But Powell signaled on Tuesday that the central bank could close its purchases faster. ‘bonds, thereby reducing the amount of economic juice the Fed will add in the coming months.
“At this point, the economy is very strong and inflationary pressures are high,” Powell said during a hearing before the Senate Banking Committee. “So it’s appropriate, in my opinion, to consider completing the reduction in our asset purchases, which we actually announced at our November meeting, perhaps a few months earlier.”
Mr Powell said he expected Fed officials to discuss the slowdown in bond buying more quickly “at our next meeting,” which is scheduled for December 14-15. He stressed that by then policymakers will have a better idea of ââthe new Omicron variant of the coronavirus, a new labor market report and updated inflation figures.
Mr Powell has made it clear that it is too early for Fed policymakers – or anyone else – to say how much the new variant will affect the economy, as it will depend on how easily it gets transmitted. and if it causes more serious illness.
“What the experts are telling me is that we will know a lot about these answers in about a month,” he said. “We will know something, however, in a week or 10 days.”
For now, he said, “it’s a risk, it’s a baseline risk – it’s not really built into our forecast.”
While Omicron’s danger remains uncertain, another wave of the virus would pose a dual threat to the economy: it could prevent workers from returning to the workforce just as it would prevent disrupted supply chains from returning. to normal, thus preventing a full recovery in the labor market. while making inflation last longer. And the potential threat strikes at a difficult time for policy makers.
The economy has rebounded this year and strong demand has met with limited supply to push inflation up. The central bank has slowly reoriented its economic policy as price gains remain stubbornly high, trying to put itself in a position to react if necessary. Now the Fed appears to be pivoting more aggressively – and focusing in a more concerted manner on controlling rapid inflation.
âIn general, the higher prices we are seeing are related to the imbalances between supply and demand that can be attributed directly to the pandemic and the reopening of the economy, but it is also true that the price increases are occurring. have spread much more widely in recent months, âPowell said Tuesday. “I think the risk of higher inflation has increased.”
Monetary policy makers had focused in recent months on helping the economy heal, hoping to get millions of workers still out of the labor market back to work.
The Fed’s key rate, its most traditional and powerful tool, has remained close to zero for this purpose. Officials had stressed they would be patient to withdraw that support and cool the economy, giving missing employees more time to return.
But their tone seems to change.
Slowing down bond purchases quickly would put the authorities in a position to increase borrowing costs sooner than expected. Raising interest rates sooner or faster would accelerate the economic brakes, which would help slow home construction, business expansion and consumer spending. Weaker demand would in turn help to push prices down over time.
By trying to curb price hikes, the Fed would likely slow hiring. It could be painful at a time when people are staying out of work in part because of fear of the virus or a lack of child care.
This is why Omicron could pose such a big challenge. If the new variant continues to close factories and slow shipping lanes while keeping potential job candidates at home, it could put the Fed in a difficult position. Central bank policymakers are expected to promote both full employment and keep prices stable, and such a situation would force them to choose between these goals.
Mr Powell’s willingness to remove support faster despite the new variant – and his outspoken recognition that the price gains aren’t about to be as fleeting as officials once hoped – drew the attention of investors.
At one point, Mr Powell even said that in “the next few meetings” he expected the Fed’s policy committee to say that when it comes to inflation, its standard of rising of interest rates had been observed. This would mean central bankers would simply look to the job market to determine when, if and how much to raise borrowing costs.
“The tone of his remarks was particularly hawkish, suggesting that the Fed is focusing primarily on the risk of more persistent excess inflation,” wrote Krishna Guha, economist at Evercore ISI, in a research note reacting to the testimony.
Understanding the supply chain crisis
Shares, which had fallen about 0.5% for much of the morning, fell after comments from Mr Powell, with the S&P 500 trading lower about 1.9% shortly after noon. Short-term bond yields, which are heavily influenced by the Fed’s rate hike expectations, soared as investors began to expect what is sometimes referred to as a “hawkish” approach to debt. interest rate policy.
“The Fed is the ultimate owner of the ‘transitional’ characterization, and the president’s decision to go beyond it is a decidedly hawkish step,” wrote Ian Lyngen, head of US rate strategy at BMO Capital Markets in New York. York, in a note to clients shortly after Mr. Powell’s comments.
The Fed’s change in approach comes at a sensitive time for Mr. Powell. The Biden administration announced last week that it would reappoint him as Fed chairman and elevate Lael Brainard – now governor – to vice chairman of the central bank. Both await confirmation from the Senate.
The twin threat of lasting supply chain disruptions and another pandemic outbreak also comes as Republicans attempt to attribute high inflation to the Biden administration and its policies. Several Republican senators posed combative questions of Mr. Powell and Treasury Secretary Janet L. Yellen during their joint testimony on Tuesday, sometimes trying to back them up by attributing the rapid rise in prices to Mr. Biden’s policies.
The barrage of criticism has come as Democrats strive to pass another $ 2.2 trillion climate change and social policy bill before the end of the year.
Ms Yellen has championed the Biden administration’s economic agenda, insisting that the policies are fiscally responsible and would lower costs for families at a time of rising prices.
âThe Build Back Better plan contains support for households to help them face some of the heaviest and most growing costs they face,â Ms. Yellen said, highlighting proposals to make kindergarten free. , provide expanded care for the elderly and increase education. subsidies.
Republicans, who four years ago passed $ 1.5 trillion in tax cuts for most of the wealthy, called the spending proposals reckless. Ms. Yellen insisted that tax increases and an investment in the Internal Revenue Service to make sure individuals and businesses pay the taxes they owe would prevent the legislation from increasing debt.
âIt’s fully paid, or even more than fully paid,â Ms. Yellen said.
Others have criticized the administration and the Fed’s response to the virus and the risks it poses.
âWhen do we get back to more normal Fed policy execution? Thom Tillis, a Republican senator from North Carolina, asked Mr Powell, after saying the virus is likely to remain present.
“We have to be humble in our ability to predict this or really understand,” replied Powell, after saying the central bank does not expect the new variant to have “remotely comparable” fallout. to the initial pandemic caused. state and local containments.
Matt Phillips contributed reporting.