Powell Confirmation Hearing Could Shed More Light on Plans to Contain Inflation

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Investors will look for clues on the central bank’s plan to raise interest rates and reduce bond holdings

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Mr. Powell has been trying to balance two risks over the past year: prematurely raising interest rates and risking a period of prolonged, heightened unemployment, or providing too many incentives that fuel high inflation. Allows for later, forcing rapid adjustments.

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If supply-chain bottlenecks were the primary driver of inflation and expected to reverse itself over time, Fed officials were wary last year for one-time price hikes by raising rates and cooling the labor market. In the first half of 2021, he highlighted how the economy was employing millions of fewer workers than in February 2020, before the pandemic hit the US economy.

But Mr. Powell unveiled a policy pivot in late November, amid signs that the labor market was tightening. He began to signal greater concern that demand was stronger than expected and could fuel widespread and sustained price pressures, even if the latter was foolishly driven by supply problems.

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“There is a real risk now, I believe, that inflation could be more stable and … the risk of higher inflation is increased,” Mr. Powell explained at a news conference last month.

In testimony prepared for Tuesday’s hearing, Mr Powell said the central bank would use its tools to “prevent high inflation from freezing”.

Mr Powell has said that using pre-pandemic labor market benchmarks may no longer be appropriate to guide officials’ policy decisions, another clue that rate hikes could begin in March.

“We may start to see that the post-pandemic economy is likely to be different in some respects. These differences have to be taken into account in the pursuit of our goals,” Mr. Powell said in his written testimony. Monetary policy needs to “take a comprehensive and forward-looking approach, keeping pace with the ever-evolving economy.”

Fed officials have indicated they may begin reducing their asset portfolios soon after raising rates, which would be another form of toughening policy.

Officials are overestimating the possibility that aggressive fiscal- and monetary-policy responses to the pandemic over the past two years have changed traditional recession dynamics, spurring wage growth that would normally help recovery after a recession. takes longer.

Sharp rises in home values, stocks and other assets have boosted wealth for many Americans, fueling strong demand and potentially allowing some to retire earlier than they expected, tightening the labor market. Is done. If the pandemic subsides, spending on services rises and more Americans are moved to look for jobs, demand could still rise.

Strong demand for goods, disrupted supply chains and various shortages pushed 12-month inflation to its highest level in decades. Core consumer prices, which exclude volatile food and energy categories, were up 4.7% in November from a year earlier, according to the Fed’s preferred gauge. This is well above the Fed’s 2% target.

But it has been developments in the labor market, not just higher inflation readings, that have provided fuel for the Fed’s shift in recent weeks toward tightening policy much faster than last summer.

The unemployment rate, which fell to 3.9% in December, is now lower than it was four years ago, when Mr. Powell became Fed chairman. This is despite the turmoil created by the pandemic, which sent unemployment in April 2020 to a post-World War II record of 14.7%.

Of the 84 lawmakers who voted to confirm Mr Powell, a Republican, four years ago, 68 are still in office, with the two party caucuses split evenly. Several lawmakers from both parties expressed support for Mr Powell when President Biden announced his reappointment in November.

Mr. Powell has focused significant time on meeting with elected officials to maintain close communication, and Mr. Powell in his testimony on Tuesday pledged to continue that practice if he is confirmed for a second term.

Mr. Powell, who spent his career in investment banking and private equity, was first nominated to a Fed board seat by President Obama 10 years ago. President Trump tapped him to serve as president four years ago.

Write Nick Timiros and [email protected]

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