–Labor Supply Can Become an Issue Going Forward for Inflation
–Whether There are Three Rate Hikes This Year Depends on Data
By Denny Gulino
WASHINGTON (MaceNews) – Without getting too specific, Federal Reserve Chair Jay Powell Tuesday pledged to quickly leave behind the era of emergency measures, fighting inflation while aware its current causes are largely out of the Fed’s control.
“It is really time for us to move away from those emergency pandemic settings to a more normal level,” he said. “It’s a long road to normal from where we are.”
Powell seemed to reinforce the consensus that the Fed will decide in March to begin a series of rate hikes, without frontrunning the FOMC’s decisions on how fast or how many rate moves will be appropriate this year.
Having abandoned a “transitory” inflation surge Powell stuck to his view that he hoped to see “a return to normal supply conditions” this year that would ease price pressures. So far, he said, he has not seen much progress in that direction and high inflation, he said, would extend “well into” the balance of this year.
Fedwatching commentors were somewhat split on interpreting Powell’s main message. Some saw him seeming to come down on a less aggressive path for removal of accommodation than widely assumed, concentrating on watching and waiting more than on imminent action.
Others saw Powell increasing his emphasis on the fight against inflation and, in any event, signaling more impatience with the policy status quo.
December’s Consumer Price Index is published by the Bureau of Labor Statistics Wednesday morning, with some forecasts seeing the annual consumer inflation rate topping 7%. The core rate is generally expected to top 5%, its highest since 1991.
U.S. stocks turned up at about the time Powell was telling the Senate Banking Committee that it could take a while for the policy-setting Federal Open Market Committee to reach the point of removing accommodation rather than just slowing stimulus. The tech-heavy Nasdaq gained the most. Tech stocks typically benefit from an outlook for less rate appreciation.
However, at about the same time he was also pledging to raise rates to combat inflation while acknowledging rate hikes are not the only answer. “It’s not just a question of restraining demand,” he said.
The FOMC meeting late this month would be a third opportunity to discuss the options after what was seen as a November “pivot” toward tighter policy. At the December meeting the FOMC decided to speed up tapering by reducing asset purchases by $30 billion a month. Atlanta Fed President Rafael Bostic has suggested the purchases be cut by as much as $100 billion a month.
Some forecasters see as many as six quarter-point rate hikes this year, detecting an increased hawkishness in the minutes of the December FOMC meeting released last Wednesday. The Fitch ratings firm, however, said Tuesday it saw only two hikes this year after hearing Powell testify.
This round of tapering and then runoff of the balance sheet will likely be “sooner and a little faster” than last time, Powell said, when the shrinkage was passive, as the Treasury securities matured, not involving active selling.
Powell again linked the control of inflation to the encouragement of job creation, saying, “You’re not going to have maximum employment without price stability.” By making the two Fed mandates complementary rather than in opposition Powell has neutralized much of the criticism that he was favoring job creation over quelling inflation.
He repeatedly observed that this bout of aggressive inflation is not the standard demand-push variety that can be entirely attacked with higher interest rates. Higher energy, food and automobile prices are being primarily generated by supply disruptions that are outside of the Fed’s control, he said. In addition, the pandemic is a separate source of inflation pressure by reducing the supply of labor. That in turn, can exacerbate inflation.
“My expectation is,” he said, “that we will see some relief on the supply side as the year goes on. By that I mean supply chains will start to loosen up. The shortages will start to be lesser.”
“If that doesn’t happen and we see inflation becoming even more persistent and even higher, then I think the risk of it becoming entrenched in the psychology of businesses and households and people, I think that increases and that would indicate we would respond.”
The Fed will take its time, he said, in determining what to do. “Monetary policy is going to have to adapt,” he said, “as we learn more. And we’re going to learn a lot about the path of inflation” in the first half of this year.
The Fed, he said, is watching particularly closely how the supply of workers has been less than expected because that could amplify the threat of inflation.
“Labor supply can be an issue going forward for inflation, probably more than the supply-chain issues we’re seeing.
The Fed is also closely following the path of the Omicron variant.
“I think the economy will continue to be able to deal with these outbreaks,” he said. “I think it is likely though if the experts are right and Omicron is going to go through really quickly and peak perhaps within a month and then come down after that I think it’s likely you will see lower hiring and perhaps a pause in growth and that kind of thing, it should be short-lived.”
Then the forecast for the next quarter or two “would be very positive.” What we’re seeing, he added, “is an economy that functions right through these waves of Covid.”
Whether there are three rate hikes this year, as was the median expectation in the latest quarterly “dot plot” “depends on the data.”
While nominally a job interview, with the Senate committee considering his renomination to be Fed chair, committee approval was assured early on as the ranking Republican member Pat Toomey told Powell he would vote in favor, guaranteeing Republicans would compensate for as many as three threatened Democratic defections.
On other topics, Powell said the Fed’s long awaited paper outlining the considerations about any Fed-backed digital dollar will be published in “coming weeks.” He said most of it will be devoted to asking for input although the Fed will take some positions on the issue.
Contact this reporter: denny@macenews.com
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