Powell says Fed won’t hike rates without clear spike in inflation

Federal Reserve Chairman Jerome Powell said Wednesday that the central bank will not cut back on support for the U.S. economy without seeing a substantial increase in inflation.

In a Wednesday speech, Powell insisted that the Fed would not begin hiking interest rates or tapering monthly purchases of Treasury and mortgage bonds — potentially slowing the recovery from the coronavirus recession — without proof that the economy was on the verge of overheating.

After years of low inflation despite unemployment at 50-year lows, Powell argued that there was no reason to think that the U.S. must sacrifice a full labor market recovery to preserve price stability.

“We will not tighten monetary policy solely in response to a strong labor market,” Powell said during a virtual event hosted by the Economic Club of New York.

“Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families,” he continued.

Powell’s remarks come amid concern among Republican lawmakers and primarily conservative economists that President Biden’s $1.9 trillion coronavirus relief and economic aid proposal could spur rampant inflation. Economists widely agree that the U.S. needs more fiscal stimulus, but differ on how much is necessary given the strong likelihood of a swift economic rebound once the COVID-19 pandemic is contained. 

Critics of Biden’s proposal say it makes little sense to pass another trillion-plus stimulus bill and risk overheating the economy with a swift recovery in sight. Supporters of his approach argue that millions of households and thousands of businesses are still in dire need of support and more support is needed to prevent a plodding recovery.

Powell, a Republican, has largely dismissed concerns about stimulus-driven inflation, saying that the risks of not doing enough to foster a full rebound are far greater. He said Wednesday that the Fed would also like to see inflation run slightly above its 2 percent target to compensate for years of below-target price and wage increases, reflecting a shift in their approach that was codified in August.

“Experience tells us that getting to and staying at full employment will not be easy. In the near term, policies that bring the pandemic to an end as soon as possible are paramount,” Powell said.

While the U.S. unemployment rate dropped to 6.3 percent in January, Powell noted that it would be closer to 10 percent if it counted workers that dropped out of the labor force because of the pandemic. He added that the labor force participation rate had dropped to its lowest levels since the mid-1970s, a deep hole for the U.S. to fill.

Inflation, however, came in at a cool 0.3 percent in December, according to federal data released Wednesday, and consumer prices minus food and energy rose just 1.4 percent since last January.

For those reasons, Powell argued that it was imperative to keep up support for the economy through all channels of government given the deep economic pain facing the least well-off and hardest hit.

“Workers and households who struggle to find their place in the post-pandemic economy are likely to need continued support,” he said.