Fed chief holds firm amid inflation concerns

Federal Reserve Chairman Jerome Powell said Wednesday that the U.S. economy still has “some ground to cover” in the labor market before the central bank could begin easing off stimulus despite rising inflation.

During a Wednesday press conference, Powell said the U.S. had moved closer to the “substantial further progress” the Fed wants to see before beginning to reduce its monthly bond purchases but remained at least several months away from a formal taper.

“I think we’re some way away from having had substantial further progress towards the maximum employment goal. I would want to see some strong job numbers,” Powell said, noting that the 5.9 percent June unemployment rate did not reflect millions of people who want to work but have not yet rejoined the labor force.

He cited lingering health concerns, preferences for better employment and federal jobless benefits as reasons the labor market had not reached a full recovery that would clear the way for a reduction in the Fed’s bond purchases.

“We hear from businesses all over the country that it’s very hard to hire, and that may be because people are shopping carefully for their next job,” Powell said.

“I think the bottom line on this is people want to work,” he continued. “Americans want to work, and they’ll find their way into the jobs that they want. It may take some time, though.”

Powell spoke to reporters shortly after the Fed’s Federal Open Market Committee (FOMC) announced it would keep interest rates at a 0 to 0.25 percent baseline range and continue its monthly purchases of at least $80 billion in Treasury bonds and $40 billion in mortgage-backed securities, as widely expected.

The FOMC did, however, note that “the economy has made progress” toward the Fed’s goals of maximum employment and inflation on track to be slightly higher than 2 percent annually.

While the U.S. remains more than 6.8 million jobs below its February 2020 peak, inflation has risen to an annual rate of more than 5 percent — well above the Fed’s target — largely due to supply disruptions and kinks related to the reopening of the economy.

A growing number of Republican lawmakers and inflation hawks have called on the Fed to halt rising consumer prices and skyrocketing housing costs by cutting off its bond purchases, saying the economy is well past the need for Fed support.

Much of the GOP criticism, however, is focused on President Biden and congressional Democrats, who are moving forward with plans to spend as much as $3.5 trillion on an infrastructure package on top of a $1.2 trillion bipartisan measure.

The price pressures have also stoked an internal debate within the Fed, according to minutes from recent meetings, over how quickly the bank should begin tapering despite considerable distance from its maximum employment goal.

Powell said Wednesday that while inflation had exceeded his expectations, “we think that those are temporary things because the supply side will respond [and] the economy will adapt.”

“If you look at the most recent inflation report, what you see is that it came in significantly higher than expected, but essentially all of the overshoot can be tied to a handful of categories, and it isn’t the kind of inflation that’s spread broadly across the economy,” he said.

“It’s new, used and rental cars. It’s airplane tickets. It’s hotels. It’s a couple of other things. And each of those has a story attached to it that is really about the reopening of the economy.”

A broad range of economists, including Treasury Secretary Janet Yellen and Biden’s economic advisers, share Powell’s view that inflation will cool off as the economy normalizes.

But Powell conceded Wednesday that the Fed doesn’t have “much confidence, let’s say, in the timing of that or the size of the effects in the near term.”

The uncertainty over inflation poses a significant obstacle for Powell as he attempts to keep the Fed unified behind a new framework that calls for allowing the economy to fully recover by holding off on interest rate increases until there are substantial signs of persistently rising inflation.

Persistent inflation could jeopardize Powell’s shot at a second stint as Fed chief. His term expires in February, and Biden will need to decide in the coming months whether the Trump appointee deserves another four years as head of the central bank.

Rising COVID-19 cases driven by the delta variant have also thrown a wrench in the Fed’s ability to gauge the economy’s health and outlook.

Powell expressed confidence Wednesday that while the delta variant could take a staggering health toll in some regions of the U.S., it would not be a significant blow to the broader domestic economy.

“It certainly is plausible that people would pull back from some activities because of the risk of infection — dining out, traveling, some schools might not reopen,” he said. “We don’t have a strong sense of how that might work out, so we’ll just be monitoring it carefully.”