Inflation Will Likely Remain High in Coming Months, Says Fed Chair Powell

Price gains are up “notably,” the Federal Reserve chair told House lawmakers, but that owes partly to temporary factors.

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The Fed chair says inflation will likely remain high in coming months.

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Fed Chair Expects Inflation to Remain Elevated in Coming Months

Jerome H. Powell, the Federal Reserve chair, told House lawmakers that inflation increased “notably” in the country’s reopening from the pandemic and would most likely stay higher in the next months before moderating.

Over the first half of 2021, ongoing vaccinations have led to a reopening of the economy and strong economic growth, supported by accommodative monetary and fiscal policy. Real gross domestic product this year appears to be on track to post its fastest increase in decades. Household spending is rising at an especially rapid pace, boosted by strong fiscal support, accommodative financial conditions and the reopening of the economy. Inflation has increased notably and will likely remain elevated in coming months before moderate. Inflation is being temporarily boosted by base effects as the sharp pandemic-related price increases from last spring drop out of the 12-month calculation. In addition, 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. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy. To avoid sustained periods of unusually low or high inflation, the F.O.M.C.’s monetary-policy framework seeks longer term inflation expectations that are well anchored at 2 percent, the committee’s longer run inflation objective. Measures of longer term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the F.O.M.C.’s longer run inflation goal. At our June meeting, the F.O.M.C. kept the federal funds rate near zero and maintained the pace of our asset purchases. These measures, along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete.

Jerome H. Powell, the Federal Reserve chair, told House lawmakers that inflation increased “notably” in the country’s reopening from the pandemic and would most likely stay higher in the next months before moderating.CreditCredit…Pool photo by Graeme Jennings

July 14, 2021, 8:30 a.m. ET

Jerome H. Powell, the Federal Reserve chair, told House lawmakers that inflation has increased “notably” and is poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices is pushing central bankers to rush to change policy.

The Fed chair attributed high inflation numbers to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expect inflation to begin calming in six months or so.

Mr. Powell’s testimony before the House Financial Services Committee on Wednesday, comes at a fraught moment politically and economically when it comes to inflation. The Consumer Price Index spiked by 5.4 percent in June, the biggest jump since 2008 and a larger move than economists had expected. Price pressures appear to be poised to last longer than policymakers at the White House or Fed had expected.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.

He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains are coming from a “small group” of goods and services directly tied to reopening.

Mr. Powell attributed the current pop in prices to a series of factors: temporary data quirks, rising prices on goods and services facing supply constraints that ought to “partially reverse” and climbing costs for services that were hard-hit by the pandemic and are now experiencing a demand surge. He noted that longer-run inflation expectations remain under control — which matters because inflation outlooks help to shape the future path for prices.

Expectations “have moved up from their pandemic lows and are in a range that is broadly consistent with the F.O.M.C.’s longer-run inflation goal,” Mr. Powell said, referring to the policy-setting Federal Open Market Committee.

“We are monitoring the situation very carefully, and we are committed to price stability,” Mr. Powell said. He added that “if we were to see that inflation were remaining high and remaining materially higher above our target for a period of time — and that it was threatening to uproot inflation expectations and create a risk of a longer period of inflation — then we would absolutely change our policy as appropriate.”

For now, the Fed chair made no indication that the path for policy is poised to change based on the hotter-than-expected price data. He said that labor market conditions are improving but that “there is still a long way to go” and that the Fed’s goal of achieving “substantial further progress” toward its economic goals before taking the first steps toward a more normal policy setting “is still a ways off.”

Fed officials are debating when and how to slow their $120 billion of monthly government-backed bond purchases, which would be the first step in moving policy away from an emergency mode. Mr. Powell said those discussions will continue “in coming meetings.”

The central bank is also maintaining its policy interest rate at near-zero, which helps to keep borrowing cheap for consumers and businesses. Officials have set out a higher standard for lifting rates: They want the economy to return to full employment and inflation to come in on track to average 2 percent over time.

Their guidance says they want to see inflation “moderately” above 2 percent for a time, and Mr. Powell was asked on Wednesday what that standard means at a time when price pressures are so strong.

“Inflation is not moderately above 2 percent, it’s well above 2 percent,” Mr. Powell said of the current data. “The question will be, where does this leave us in six months or so — when inflation, as we expect, does move down — how will the guidance work? And it will depend on the path of the economy.”

Raising rates is not yet up for discussion, officials have said publicly and privately.

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