By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell pledges the Fed will act to prevent already “elevated” inflation from becoming further “entrenched” in congressional testimony prepared for delivery Tuesday morning.
However, the Fed chief does not elaborate on how precisely he and his fellow policymakers will proceed to combat wage-price pressures in testimony to be delivered before a Senate Banking Committee confirmation hearing on his renomination as Fed chair.
Powell, who was renominated by President Biden to another four years as Fed chair in November, will tell the senators that the economy is doing very well in its recovery from the Covid pandemic, but admits that the recovery has been accompanied by virulent inflation.
He began by paying tribute to Congress for its efforts to fight the effects of virus-related shutdowns of the economy over the last two years: “Congress provided by far the fastest and largest response to any postwar economic downturn.”
As for the Fed, Powell noted, “we used the full range of policy tools at our disposal. We moved quickly to restore vital flows of credit to households, communities, and businesses and to stabilize the financial system.”
“These collective policy actions, the development and availability of vaccines, and American resilience worked in concert, first to cushion the pandemic’s economic blows and then to spark a historically strong recovery,” he continued.
Thanks to the combination of monetary and fiscal stimulus, Powell declared that “today the economy is expanding at its fastest pace in many years, and the labor market is strong.**
But all is not well, Powell conceded, as he went on to talk about the upsurge in consumer prices. Although he did not mention it, the consumer price index rose by 6.8% year over year in November – fastest pace in nearly 40 years.
“In the initial shutdown and the subsequent reopening of the economy were without precedent,” he explained. “The economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation.”
Powell, who regularly called inflation “transitory” until late last year, acknowledged that “high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation.”
Powell went on to say that the Fed is “strongly committed to achieving our statutory goals of maximum employment and price stability.”
“We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched,” he added.
Powell did not say what he is prepared to do. At its Dec. 15 meeting, the Fed’s policy making Federal Open Market Committee voted to double the pace at which it is tapering its asset purchases to $30 billion with an eye to ending them in mid-March.
What’s more, FOMC participants projected three hikes in the federal funds rate, which has been kept in a zero to 25 basis point range since March 2020.
Powell’s testimony before the Committee will be closely watched for clues as to how soon after the end of tapering, the FOMC will “lift off” from the zero lower bound, as well as how soon after that the Fed might start shrinking its $8.8 trillion bond portfolio.
Running off maturing securities and shrinking the Fed balance sheet would be another form of monetary tightening, which Fed Governor Christopher Waller has suggested could supplement, or substitute for, rate hikes.
After ceasing quantitative easing in October 2014, the Fed delayed raising rates until December of the following year and waited until 2017 to start shrinking the balance sheet, but Powell suggested in his Dec. 15 press conference that this time the FOMC might move much faster.
At the same time, Powell indicated that the FOMC will need to be flexible:
“We can begin to see that the post-pandemic economy is likely to be different in some respects,” he said. “The pursuit of our goals will need to take these differences into account.”
“To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy,” he added.
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