Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on Wednesday said they underestimated how quickly the U.S. economy would rebound from the COVID-19 recession and strain supply chains.
During a Wednesday hearing before the House Financial Services Committee, the top two U.S. economic policymakers acknowledged that high inflation has risen higher and lingered much longer than they expected.
“We understood demand would be strong,” Powell said. “We didn’t understand [the] significant problems of the supply side.”
Both Yellen and Powell said substantial fiscal and monetary stimulus played a role in stoking the higher demand that fueled inflation, but they called it a challenging side-effect of an otherwise fast recovery.
“Inflation is a matter of demand, and it’s certainly true that the American Rescue Plan put money in people’s pockets, helped them meet expenses that they had, and contributed to strong demand in the U.S. economy,” Yellen said, referring to the $1.9 trillion March stimulus bill signed by President Biden in March.
“But if you look at the amount of inflation that we have and its causes, [the stimulus bill] is, at most, a small contributor,” she continued. “It’s enabled their spending, but the fact that their spending — because of the pandemic — has been so focused on goods as opposed to services has contributed massively to the supply chain problems.”
The Biden administration and Fed have been criticized for months by Republican lawmakers and even some moderate Democrats who fear they overstimulated the economy into an inflationary spiral. Their critics have focused primarily on Biden’s March stimulus bill and the Fed’s refusal to raise interest rates as the labor market continues to recover from the loss of 21 million jobs.
Trillions of dollars of fiscal and monetary support issued since 2020 and the wide availability of COVID-19 vaccines have helped the U.S. economy recover far faster than any other nation upended by the coronavirus pandemic.
U.S. consumer spending has boomed above pre-pandemic levels, even in the face of rising prices. Employment growth and wages have also accelerated in the second half of the year with the U.S. adding an average or more than 400,000 jobs in each of the past three months.
Even so, prices for a wide range of consumer goods have risen sharply this year as manufacturers, shipping companies, suppliers and retailers struggle to keep up with demand amid a minefield of pandemic-related constraints. The emergence of the delta variant also shifted more spending into the overloaded goods sector and away from service sector industries, such as dining and entertainment, still struggling to return to pre-pandemic activity.
“It is the administration’s agenda that is driving up the cost of things. It’s making the American people worse off, not better off,” said Rep. Patrick McHenry (N.C.), ranking Republican on the Financial Services panel.
While the Fed, not Treasury, is primarily responsible for keeping prices stable, Republicans pinned most of the blame for high inflation on the Biden administration. Republican lawmakers have sought to tie Biden to rising prices ahead of the midterm elections as the party seeks to recapture the House and Senate.
Yellen defended the administration’s stimulus efforts, explaining it was “extremely hard” for policymakers to know just how much stimulus the U.S. would need to overcome the blow of the pandemic. She added that the Biden administration’s top priority was avoiding a slow, grueling recovery akin to the crawl back from the depths of the 2007-08 recession.
“We were very concerned that the most significant risk facing the American economy was a shortage of jobs and a prolonged downturn. It would scar many people, particularly the most vulnerable,” Yellen said.
Though Yellen and Powell predicted months ago that price growth would ease by the end of the year, both admitted Wednesday to underestimating supply snarls.
Powell added that while the U.S. was experiencing the strongest rebound of any nation hit hard by the pandemic, it wasn’t the only one suffering from higher inflation.
“COVID continues to impose supply-side constraints,” Powell said. “Many of the same features that we’re seeing here, you’re seeing elsewhere, but different countries are feeling it to different degrees.”
The emergence of the omicron variant of COVID-19 has also threatened to exacerbate backlogs in supply chains, particularly as nations with lower vaccination rates brace for potential restrictions and lockdowns. Biden has ruled out such measures in the U.S., but another surge of cases could shift more spending into the goods sector and prevent some of the millions who left the labor force last year due to health concerns from returning.
Democrats insisted that the Fed and administration could not afford to curb efforts to support the recovery as a new variant threatened to upend progress. They also argued that cutting back on fiscal and monetary support would do little to help clear up port backlogs, accelerate manufacturing or bring more workers back into understaffed industries.
“It is crucial that the Fed hold off on declaring a premature victory on this economic recovery until the communities that have been hit the hardest — people of color, renters who are behind on their rent and women, who have done the bulk of the caregiving — have a chance to experience the recovery,” said Rep. Maxine Waters (D-Calif.), chairwoman of the Financial Services panel.
Powell said this week the Fed would consider accelerating its taper of monthly bond purchases during its upcoming monetary policy meeting, but he has not commented on how soon the bank may begin interest rate hikes. Yellen also touted Biden’s proposed $1.75 trillion social services and climate plan as a way to ease long-term prices as the administration tackles the short-term challenge of unclogging supply lines.
Yellen added that the plan would have little, if any, inflationary impact, since its cost is mostly covered by a range of tax increases and other revenue boosting measures.
But Republicans insisted that Biden was running the U.S. in an inflation crisis, even as most economists still expect price increases to eventually ease.
“Y’all won the election. It’s your prerogative to ignore Republican concerns. But you went forward with the American Rescue Plan, which we warned would increase inflation,” Rep. Anthony Gonzalez (R-Ohio) said.
“That’s exactly what happened. You’re set to repeat the exact same mistake.”