Fed Won’t Raise Rates Just Due to Inflation Fears, Powell Says

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  • Fed to Monitor Wide Range of Labor Market Data, Powell Says
  • Lawmakers press Fed chief on inflation and job recovery

WASHINGTON, June 22 (Reuters) – Federal Reserve Chairman Jerome Powell on Tuesday reaffirmed the US central bank’s intention to encourage a “broad and inclusive” labor market recovery, and not raise the interest rates too quickly based solely on the fear of coming inflation.

“We will not raise interest rates preemptively because we fear the possible appearance of inflation. We will wait for evidence of real inflation or other imbalances,” Powell said during a hearing before a panel of the US House of Representatives.

Recent price increases have pushed the Consumer Price Index to a 13-year high, prompting Republicans on the committee to come up with charts detailing peaks in consumer goods like bacon and used cars to suggest that the price increases are getting out of hand.

“We have unstable jobs and higher inflation,” said Rep. Jim Jordan, a Republican from Ohio, referring to congressionally mandated goals for the Fed to ensure maximum employment and stable prices. “Something has to give.”

Recent readings of high inflation, however, “do not speak of an overall tight economy” that would require higher interest rates, Powell said, citing a “perfect storm” of growing demand for goods and services and bottlenecks in their supply as the economy reopens after the pandemic.

These price pressures should ease on their own, Powell said.

When setting forthcoming monetary policy, the Fed chief promised that the central bank would keep its eyes on a wide range of labor market statistics, including the plight of different racial groups and others.

“We won’t just look at the unemployment numbers,” Powell told members of the House subcommittee on the coronavirus crisis. “We will be looking at all kinds of measures … This is the most important thing we can do” to make sure that the benefits of the recovery are better shared.

The markets changed little during the hearing.

Powell’s comments were “not really much that we’ve never heard before,” said Michael Brown, senior analyst at payments firm Caxton in London.

A SENSITIVE PIVOT

But the session, at times a fighting match between Democrats and Republicans over the Biden administration’s economic plans, hinted at the delicate line the Fed must follow in the coming months as it balances inflation risks. with its pledge to ensure the economy recovers all the jobs lost after the coronavirus pandemic begins.

Federal Reserve Chairman Jerome Powell testifies during a hearing of the United States House Oversight and Reform Subcommittee on the coronavirus crisis at Capitol Hill in Washington, United States on 22 June 2021. Graeme Jennings / Pool via REUTERS

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Until recently, there was little perceived conflict between these goals.

Yet since Powell’s last appearance before the subcommittee in September, the central bank’s inflation outlook has doubled. The projections released by the Fed last week showed that prices in 2021 are expected to rise at a rate of 3.4%, compared to 1.7% expected last September.

Recent job growth, meanwhile, has been slower than expected. Some of Powell’s colleagues are now openly suggesting that the pandemic has caused so many to retire that it may be unrealistic to think the United States can return to pre-crisis employment levels before the Fed does. needs to tighten monetary policy.

This is a stance contrary to Powell’s emphasis on restoring the economy to early 2020 conditions, and that of the influential Democratic chairman of the subcommittee, Rep. James Clyburn of South Carolina, that prompted Powell on Tuesday to ensure a fair and equitable job recovery. .

“Millions of Americans depend on the Fed to continue to support the recovery of the economy,” said Clyburn, who has close ties to President Joe Biden.

Biden must decide in the coming weeks to re-elect Powell for a second four-year term. In the closing minutes of the hearing, the Fed chairman received a commendation from another prominent Democrat, the chair of the House Financial Services Committee, Maxine Waters of California.

Waters noted that Powell was ready to “think big” about politics as the pandemic set in and said she wanted to thank him “not only for his leadership… but his creativity.”

Yet a rapidly improving economic landscape is starting to reshape the Fed’s views on when to scale back some of these pandemic efforts as the crisis recedes.

At their meeting last week, Fed officials predicted they could hike interest rates as early as 2023, perhaps a year earlier than expected, and Powell told a press conference that the central bank was beginning to discuss when to cut its $ 120 billion in monthly purchases. bonds and government securities used to support the recovery.

Powell told reporters the economy “is still a long way off” from the rehiring progress the Fed has said it wants to see before making any changes, a sign that the timing for a real policy change remains in the air.

But the change in tone and the projections surprised the markets, which are now closely monitoring whether the Fed keeps its promises in the labor market.

Transactions in the inflation-protected securities market and the like show investors are betting the Fed will raise rates even faster than policymakers expect, a potential loss of confidence in the central bank’s willingness to manage. a “hot” economy with high inflation to encourage a robust recovery in employment.

Reporting by Howard Schneider Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.


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