Powell Says Fed Faces ‘Difficult Trade-Off’ if Inflation Doesn’t Moderate

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‘We expect inflation to come down’, central bank leader tells MPs

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“We expect high inflation to subside, as we think the factors causing it are temporary and linked to the pandemic and the reopening of the economy,” he said. “These are not things we can control.”

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Rising vaccination rates and nearly $2.8 trillion in approved federal spending since December 2020 have produced a recovery like none in recent memory. Inflation has soared this year, with “core prices,” which exclude volatile food and energy categories, up 3.6% in July from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains and shortfalls associated with reopening the economy.

Under questioning from lawmakers on Thursday, Mr Powell conceded that the central bank could face difficult decisions next year if inflation remains high while unemployment also rises.

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“Almost all the time, inflation is low when unemployment is high, so interest rates act on both problems,” he said.

It is not so now. Inflation is well above the Fed’s 2% target, and the economy is “far, we think, from full employment,” Mr. Powell said. “That’s the very difficult situation we find ourselves in.”

If inflation comes down on its own, “we won’t eventually face that tough trade-off” to determine whether to raise interest rates to cool the economy and reduce inflation, when still The labor market is sluggish, Mr. Powell said.

The Fed chief signaled last week that the central bank was ready to begin reversing its pandemic stimulus programs in November, and the Fed’s rate-setting committee indicated it would look into the next phase amid risks of a long-anticipated rise in inflation. The year could raise interest rates.

Mr. Powell and his colleagues have indicated strongly in recent days that – unless the economy suffers a major blow – the Fed is formalizing a gradual reduction, or tapering, of $120 billion in monthly purchases in Treasuries and mortgages. will be announced. loan at its next meeting, 2–3 November.

New projections released at the end of the Fed’s two-day policy meeting last week showed that half of 18 officials expected interest rates to rise by the end of 2022. In June, only seven officials estimated that timetable, with most increasing the rate instead. 2023. Projections show that many officials expected slightly higher inflation than in June next year, and almost all expected more rate hikes in 2023.

Ms Yellen also reiterated her plea that lawmakers move quickly to raise the federal borrowing limit, a move that does not approve new spending, but allows the government to pay bills that were previously have agreed to bear the same.

When asked if she would support the elimination of the debt limit, Ms Yellen said yes. He said Congress should make sure that when it makes tax and spending decisions, the US has the ability to make up for any shortfalls with new borrowing.

“I believe it is very disastrous to put the President, and myself, the Treasury Secretary, in a position where we may be unable to pay the bills as a result of those previous decisions,” she said.

Ms Yellen told Congress this week that the Treasury would be unable to pay all of the government’s bills on time unless lawmakers raise or suspend the federal debt limit until October 18. After that, the US could default on its debt, potentially triggering a tailwind in financial markets that pushes the US into recession.

With less than three weeks until the government is out of cash, Congress is locked in an impasse over raising the debt limit, with Senate Republicans this week blocking Democratic efforts to suspend the ceiling until 2022.

The House voted 219-212 on Wednesday to suspend the limit, but Senate leaders declined to say how they would proceed, insisting they have the right to vote on Republicans to drop their opposition and limit the debt. There are alternatives to pressurizing to provide votes to lift it.

Kate Davidson at [email protected] and Nick Timiros at [email protected]

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