Federal Reserve Chairman Jerome Powell, recently appointed head of the central bank for a second four-year term, said on November 22 that he would use the Fed’s arsenal to prevent inflation from becoming a more permanent feature of American life.
Powell made the announcement at a White House press briefing at which President Joe Biden announced his reappointment and also named Lael Brainard, a Fed board member, as deputy chairman of the Fed.
“We know that high inflation is taking its toll on families, especially those less able to pay higher spending on basic necessities such as food, housing and transportation,” Powell said, acknowledging the disproportionate impact of rising prices on Americans with low incomes.
“And we are using our tools both to support the economy and a strong labor market and to prevent higher inflation from entrenching,” he added, referring to the Fed’s dual mandate: “maximum employment” and price stability.
After announcing two candidatures, Biden praised Powell’s commitment to the “maximum employment” component of the Fed’s dual mandate, while noting Powell’s role in running the Fed through a “historical review” in which the central bank adopted a more flexible inflation targeting regime. … This basically allowed the Fed to temporarily exceed its inflation target of 2 percent to pump more money into the economy to ensure a more sustainable labor market recovery.
“With our country losing jobs last year and panic reigning in our financial markets, Jay’s strong and determined leadership helped stabilize the markets and put our economy on a sustainable recovery path,” Biden said of Powell.
Yet unprecedented levels of monetary stimulus, which included monthly asset purchases of about $ 120 billion and cutting interest rates to near zero, along with massive fiscal measures, also had an unwanted spillover effect, helping to raise inflation to levels unseen in more than in 30 countries. years.
“The economy is growing at its fastest pace in years, promising a return to peak employment,” Powell said, with a “peak employment” condition, which the Fed defines as the lowest unemployment rate the economy can withstand while inflation is stable. Since there will always be people in between positions, this figure will never be zero, and therefore economists usually estimate it in the range of 3 to 5 percent, while the head of the Atlanta Fed Rafael Bostic recently identified this as a state in which “Every American who wants a job has one.
Powell, echoing his often-repeated view that the pandemic’s supply disruptions played a major role in driving prices up, said: “The unprecedented opening of the economy, along with the ongoing fallout from the pandemic, has driven supply and demand. imbalances, bottlenecks and a surge in inflation. “
The latest Labor Department report on consumer prices showed inflation in the 12 months to October was 6.2 percent, the highest in 31 years.
Faced with soaring inflation, the Fed has begun to phase out asset purchases at a rate of around $ 15 billion a month, and while central bank policymakers have said it is not yet time for rate hikes, interest rate futures markets predict the Fed will begin to tighten in June 2022. of the year.
Powell, along with other Fed officials, argued that the current surge in inflation is “temporary” and will stop once supply-side dislocations are smoothed out. However, Powell said at a November 3 news conference that the central bank’s idea of a “transition” has evolved as upward price pressures have proven more resilient than previously thought.
“What is really transitory for us is that if something is transitory it will not leave behind a permanent or very sustained higher inflation rate,” Powell said, adding that it’s not time to raise interest rates as “there is reason … cover ”in terms of labor market recovery.
But with job vacancies close to all-time highs and layoff rates, which reflect workers’ confidence in finding better jobs, hit an all-time high, some economists say it’s time for the Fed to slow down easy money more decisively.
Former Treasury Secretary Larry Summers, who sounded the alarm early over current price increases, told CNN a few weeks ago that he believed the labor market was limited and soft monetary policy was counterproductive.
“We have to admit that our problem is not that not enough people have jobs,” Summers told the publication. “The current problem is that we are pushing demand into the economy faster than supply can grow, and that we will get more and more inflation until we stop doing it,” he said.
“This is a real problem,” he added.
Summers predicted that unless the Fed makes significant policy changes or an “accident” hits the economy severely, it is “highly unlikely” that inflation will drop to the central bank’s 2 percent target for the foreseeable future.
Summers also said that, in his opinion, the Fed is not winding down its asset purchase program quickly enough.
“If they started by going to immediately stop buying mortgages in the midst of a major housing bubble, that would be helpful,” he said, adding that the rise in house prices has yet to be fully reflected in headline inflation.
“If they said they were going to stop increasing their balance sheet and not shrinking their balance sheet, but just stop the growth process – if they were going to do it in three months, not eight, that would be helpful,” he continued.
“I think the Fed made a significant mistake in its approach by doubling the massive fiscal stimulus we had at the start of the year with really loose monetary policy,” Summers added.