Federal Reserve Chair Jerome Powell signaled no imminent change in the Fed’s interest rate policies Wednesday, while suggesting inflation “will likely remain elevated in coming months”. Powell said it will eventually “moderate”.
The comments came from testimony Powell gave to the House Financial Services Committee.
“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,” Powell said. “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.”
Once those bottlenecks unwind, Powell said inflation should ease. However, he held off on saying inflation would “drop back” to the Fed’s target of 2 percent. Powell had made that assertion three weeks ago to another House panel.
The Fed has said it will keep its benchmark short-term rate pegged near zero until it believes maximum employment has been reached, and annual inflation is over 2 percent for some time. Powell addressed employment in his testimony.
“Labor demand appears to be very strong,” Powell said. “Job openings are at a record high. Hiring is robust. And many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June.”
Powell added the Fed might adjust its policies if inflation, or the public’s expectations for inflation, “were moving materially and persistently beyond levels consistent with our goal.” This is important to keep track of, because people’s expectations for inflation can become self-fulfilling. If consumers think prices are going to rise, they may demand higher pay in response. In return, businesses may raise prices to compensate for the increased wages.
Powell’s remarks come as a government report released Wednesday showed wholesale prices jumped 7.3 percent in June, compared to a year earlier. That’s the fastest 12-month gain on record dating to 2010.
