Fed Chair Powell Addresses Inflation at Senate Confirmation Hearing
Aggressive Stimulus No Longer Needed, Inflationary Pressures the Focus
Central bank chairman Jerome Powell told Senate lawmakers during his reconfirmation hearing that Federal Reserve officials think the economy no longer needs aggressive stimulus. In fact, he said the Fed is prepared to begin raising interest rates in an effort to curb inflation and cool down the US economy. Powell expressed optimism that the supply chain’s problems will begin to unwind this year, which could also ease inflationary pressures.
Powell was repeatedly pressed about inflation during the Senate hearing, as the previous 12-month increase to the CPI matched levels not seen since the early 1980s. He indicated the Fed won’t allow inflation to become “entrenched,” highlighting the new, more proactive outlook from the central bank.
Powell Says It’s a Long Road Back From Pandemic-Era Policies
At the Fed’s December meeting Powell and his colleagues in the central bank signaled interest rate changes could begin by March. Three quarter-point increases are expected, as well as an offloading of bond holdings. As the pandemic sent the economy into a deep but short-lived recession in 2020, the Fed enacted an easy-money policy to help offset market volatility and keep borrowing costs down.
Powell says pandemic-related policy is no longer appropriate. He adds there’s no shortcut and that returning to normal will take time. Analysts note if the Fed raises interest rates prematurely unemployment numbers could jump, while too much stimulus could spike inflation even further.
Fed Could Soon Begin Shrinking Asset Portfolio
Fed officials are also indicating plans to sell off portfolio assets as another means of tightening up monetary policy. Powell indicated this could begin later on in 2022. There’s a perception that stimulus money paid out by Congress and the Fed’s dovish policy have helped wage growth, which typically lags following an economic downturn.
There are a number of factors contributing to increased consumer demand, including rising home values and gains in the stock market. As the pandemic eases analysts predict consumers will also spend more on goods and services, pushing prices upwards. Increased earnings and government assistance have allowed some people to retire early or take a break, and businesses are struggling to find workers. The Fed must strike a balance between fighting inflation and maintaining the relative health of the labor market. For now Powell seems most focused on the rising prices of goods.
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