Powell Sees Tapering a ‘Ways Off,’ Gets House Inflation Grilling

The Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S. (Photographer: Stefani Reynolds/Bloomberg)

Powell Sees Tapering a ‘Ways Off,’ Gets House Inflation Grilling

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Federal Reserve Chair Jerome Powell said it was still too soon to scale back the central bank’s aggressive support for the U.S. economy, while acknowledging that inflation has risen faster than expected.

“At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December,” Powell told the House Financial Services Committee Wednesday. “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”

Powell was peppered throughout the three-hour virtual hearing with questions from both Republicans and Democrats on rising prices. Critics say inflation is being fanned by the Fed holding interest rates near zero while buying $120 billion of Treasuries and mortgage-backed securities every month. Powell stressed that while officials expect high inflation to be temporary, they would react if inflation turned out to be persistently and materially above their 2% target.

“There’s nothing in the guidance or our framework that would prevent us from doing the right thing at the right time,” he said.

Powell Sees Tapering a ‘Ways Off,’ Gets House Inflation Grilling

The Fed chair will face more questions from the Senate banking panel on Thursday.

Powell “is trying to push back on this idea on that they are under pressure to exit or that they have decided to taper soon,” said Priya Misra, head of global rates strategy at TD Securities in New York. “He said the labor market has a long way to go.”

Republicans asked Powell to explain how monetary policy could ease supply bottlenecks blamed for rising prices, or if the Fed’s bond buying was distorting financial markets.

Powell said he will be watching to see if labor supply increases as enhanced unemployment benefits expire in coming months, adding that he was willing to look through the current shortages and effects on wages and prices if necessary.

“Even after this supply comes, it is still likely that we will still be short of maximum employment,” Powell said. “That is why we don’t see that is time to raise interest rates now.”

“One of the most striking features” of Powell’s testimony “is these supply bottle in the labor market are going to resolve,” said Nathan Sheets, chief economist at PGIM Fixed Income in Newark, New Jersey. “He is stating that more with a period at the end of it rather than question mark. In my mind, it is more of a question mark.”

Ten-year Treasuries yields edged lower to around 1.35% as Powell testified and U.S. stocks closed near all-time highs.

Government data released on Tuesday showed prices paid by U.S. consumers surged in June by the most since 2008 and were up 5.4% from the same month last year.

‘Strong Demand’

“Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind,” Powell said.

Powell Sees Tapering a ‘Ways Off,’ Gets House Inflation Grilling

He also noted that asset prices and risk appetite have risen while downplaying any near-term risks to the economy from financial markets.

Powell’s remarks before Congress this week are his last semi-annual testimony before President Joe Biden decides whether to give him another four years at the Fed helm or pick someone else. Powell’s tenure as chair expires in February.

The Fed’s policy patience is part of a new framework it announced nearly a year ago that pledged to achieve an average of 2% inflation over time and not pre-judge the level of maximum employment.

Forecasts released by Fed officials last month also showed them pulling the timing of interest rate liftoff forward, with two increases penciled in for 2023, a move that pushed some market measures of inflation expectations lower.

“Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC’s longer-run inflation goal,” Powell said in his opening remarks.

Both Republicans and Democrats quizzed him about high prices and the Fed’s assessment that these increases would not be persistent.

‘Higher Than Expected’

Powell said recent readings on inflation had been “higher than expected and hoped for,” but stressed the largest gains stemmed from a small group of goods and services.

On the other hand, if high inflation persisted and was threatening to uproot inflation expectations, “we would absolutely change our policy as appropriate,” he said.

Powell emphasized that the labor market recovery was still far from complete.

“Conditions in the labor market have continued to improve, but there is still a long way to go,” Powell said, adding that despite “substantial improvements” for racial and ethnic groups, “the hardest-hit groups still have the most ground left to regain.”

The U.S. economy added 850,000 jobs in June, the biggest monthly increase since August. Still, broader measures of labor-market slack indicate it is still short of the Fed’s mandate of maximum employment. The jobless rate for Black workers stood at 9.2% compared to 6% in February 2020.

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