Jay Powell says the Fed is ready to step in if US inflation gets out of control

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Jay Powell, Federal Reserve Chairman, said the US central bank is ready to intervene if inflation gets out of control, but stressed that it expects to ease rate increases later in the year.

“Inflation has increased significantly and is likely to remain elevated in the coming months before it subsides,” Powell said in prepared remarks released ahead of a House Financial Services Committee hearing on Wednesday.

He added that the Fed “would be prepared to adjust its monetary policy stance as appropriate if we see signs that the inflation trajectory or longer-term inflation expectations are moving materially and consistently beyond levels consistent with our objective.”

Powell’s comments came on the heels of data showing the US consumer price index rose 5.4 percent in June from a year ago, reviving fears that the US economy may be overheating.

The numbers may increase pressure on the US central bank to begin the process of slowing down the large doses of monetary support it has provided to the economy during the pandemic, starting with a $120 billion cut in monthly asset purchases.

Although Powell pointed to the high inflation numbers and insisted that the Fed would not be satisfied with higher rates, he stuck to his view that the rise in inflation was largely temporary, which many central bank officials share.

According to Powell, “inflation is being temporarily boosted by the underlying effects, as pandemic-related sharp prices have fallen since last spring from the 12-month count.”

In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to rapid price increases for some goods and services, which should be partially reversed as the effects of the bottlenecks fade.

“The prices of services that have been hit hard by the epidemic have also jumped in recent months as the demand for these services has risen with the reopening of the economy,” he added.

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During the hearing, Powell will likely come under pressure from Republican lawmakers to explain the Fed’s stance on inflation. Republicans are increasingly criticizing the White House and Democrats for fueling rising inflation and a rising cost of living with the $1.9 trillion stimulus legislation passed in March.

Some also accuse the Fed of complacency in the face of rising rates, and call for the rapid removal of monetary stimulus.

But many Federal Reserve officials are wary of moving too quickly to withdraw their support for the economy. The US labor market is still far from its pre-pandemic employment levels, and the fallout from the coronavirus crisis on a global scale could still pose risks to the US economy.

US government debt extended its rally after the release of Powell’s testimony, with the benchmark 10-year bond trading down more than 0.4 percentage point on the day to 1.37 percent.

Short-term Treasuries, which are more sensitive to policy adjustments, also rose. The two-year bond yield fell 0.02 percentage point to 0.23 percent.

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During its June meeting, the Fed launched a discussion about the timing and terms of reducing its asset purchases, but Powell indicated that a decision was not imminent. The FOMC said it would need to see “more significant progress” than last December in terms of full employment and price stability targets to trigger the move.

“While the level of ‘extra significant progress’ is still a long way off, participants expect continued progress,” the Fed chair said in his prepared remarks. We will continue these discussions in future meetings. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”

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