Thu, Feb 25, 2021 page10

• Fed’s Powell downplays inflation fears

  EMPLOYMENT WATCH: Although it still has a way to go, the US economy has stabilized with the help of government spending and Fed policies, Powell said

  • AFP, WASHINGTON
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  US Federal Reserve Chairman Jerome Powell attempted to tamp down rising inflation concerns on Tuesday, while pledging to keep benchmark lending rates low until jobs recover and prices have risen consistently.

  The COVID-19 pandemic remains the key factor determining how quickly the world’s largest economy can recover, but Powell said vaccine rollouts offer hope that things can return to normal quickly and the Fed has the tools to deal with price increases.

  With the US Congress moving toward approving US President Joe Biden’s US$1.9 trillion rescue plan, the central bank head remained steadfastly noncommittal about the package, but he did downplay the need to address the US$3 trillion US government deficit immediately.

  

  US Federal Reserve Chair Jerome Powell attends a House Financial Services Committee hearing in Washington on Dec. 2 last year.

  Photo: Reuters

  Amid growing fears on markets that a quick recovery from the pandemic — fueled by more government stimulus on top of nearly US$3 trillion last year — would lead to higher interest rates and hinder the ability of companies to borrow, Powell tried to reassure skittish investors during the first day of his semiannual testimony before Congress.

  He said that the Fed would keep rates at the current level near zero until the economy reaches “maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

  However, “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said.

  Powell has said the true level of joblessness is closer to 10 percent than the official rate of 6.3 percent in January.

  Inflation is expected to pick up and would be “volatile” this year, after declines during the past year of the pandemic, and as Americans begin to spend more, he said.

  However, he told the US Senate Banking Committee that those price increases are unlikely to be large or persistent.

  “We’ve averaged less than 2 percent inflation over the last 25 years,” Powell said. “Inflation dynamics do change over time, but they don’t change on a dime.”

  The Fed is prepared to handle whatever comes its way, so “if it does turn out that unwanted inflation pressures arising are persistent ... we have the tools to deal with that,” he said.

  In more than a decade following the 2008 global financial crisis, inflation barely cracked the Fed’s 2 percent goal, even when unemployment reached a 50-year low of 3.5 percent early last year.

  That caused the central bank to rethink policy and say that rather than raise the lending rate as unemployment falls to head off inflation, it would hold fire until inflation actually breaks through the target level for an extended period.

  However, given the prospect for more stimulus fueling a rapid bounce back in economic activity, some economists have raised concerns that prices could spiral.

  The yield on 10-year US Treasury bonds — a key red flag on inflation — has spiked in the past few weeks. That in turn has hit stock prices, due to concerns that the Fed would raise interest rates more quickly than expected in an economy already awash in debt.

  In addition to keeping the key interest rate low, the central bank also would continue to buy bonds “at least at their current pace [of US$120 billion a month] until substantial further progress has been made toward our goals,” Powell said.

  Government spending and the Fed keeping its foot on the gas has helped the economy stabilize and begin to recover, although it still has a way to go, Powell said.

  “The path of the economy continues to depend significantly on the course of the virus, [but] ongoing progress in vaccinations should help speed the return to normal activities,” he said.
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