Powell Renews Forecast for Inflation Subsiding Toward Fed’s Goal
Federal Reserve Chair Jerome Powell said inflation had picked up but should move back toward the U.S. central bank’s 2% target once supply imbalances resolve.
“Inflation has increased notably in recent months,” Powell said in written remarks prepared for his Tuesday testimony before the House Select Subcommittee on the Coronavirus Crisis, citing increases in oil prices and a “rebound” in spending as the U.S. economy reopens.
“As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” he said.
Powell’s remarks reprised his opening comments at his June 16 press conference, following a policy meeting of the central bank.
Investors will tune in to the hearing Tuesday for potential questions that shed more light on his view on the pace of the economic rebound and for how much longer the central bank should keep its monetary policy on an emergency footing.
Fed officials surprised financial markets last week when their forecasts showed they pulled forward their expected timing and pace of interest-rate increases, from the current near-zero level, while also kicking off a discussion of when to taper asset purchases from their current $120 billion monthly pace.
The quarterly projections showed 13 of 18 officials favored at least one rate increase by the end of 2023, versus seven in March. Eleven officials saw at least two hikes by the end of that year. In addition, seven of them saw a move as early as 2022, up from four. The projections also showed that officials’ sense of risk and uncertainty around their inflation forecasts moved higher.
The Fed’s signals on inflation vigilance had an immediate impact on financial markets, raising short-term rates and flattening long-term yields, narrowing the spread between 5-year and 30-year Treasury yields.
Powell continued to sound optimistic on the outlook for employment in his congressional testimony.
“Job gains should pick up in coming months as vaccinations rise, easing some of the pandemic-related factors currently weighing them down,” he said.
Some Fed officials estimate that the central bank may need to tighten policy sooner than it expects, and the publication of Powell’s testimony followed remarks earlier on Monday from his colleagues on both sides of that debate.
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John Williams, president of the New York Fed, said he expects bottlenecks and imbalances produced by a strong recovery to subside, bringing inflation down to around 2% next year and in 2023. “It goes without saying that there is a great deal of uncertainty about the inflation outlook, and I will be watching the data closely,” Williams told the Midsize Bank Coalition of America.
Dallas Fed President Robert Kaplan said he favors starting the process of tapering the central bank’s ongoing bond purchases “sooner rather than later,” while his counterpart from St. Louis, James Bullard, called it “appropriate” that policy makers last week opened the taper debate. Neither Bullard or Kaplan votes on the Federal Open Market Committee this year.
U.S. central bankers predicted that their preferred price measure, the personal consumption expenditures price index, would rise 3.4% this year, and then decelerate to 2.1% and 2.2% over the next two years, according to median estimates. The most recent reading on inflation, the consumer price index, rose 5% in May from a year earlier.
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