US Federal Reserve Chairman Jerome Powell on Wednesday said it was still too soon to scale back the central bank’s aggressive support for the US economy, while acknowledging that inflation has risen faster than expected.
“At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December,” Powell told the US House of Representatives Financial Services Committee. “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”
Throughout the three-hour virtual hearing, Powell was peppered with questions from Republican and Democratic US lawmakers on rising prices.
Critics say that inflation is being fanned by the Fed holding interest rates near zero while buying US$120 billion of Treasuries and mortgage-backed securities every month.
Powell said that while Fed officials expect high inflation to be temporary, they would react if inflation turned out to be persistently and materially above the central bank’s 2 percent target.
“There’s nothing in the guidance or our framework that would prevent us from doing the right thing at the right time,” he said.
Powell was to face more questions from the US Senate banking panel yesterday.
Powell “is trying to push back on this idea on that they are under pressure to exit or that they have decided to taper soon,” said Priya Misra, head of global rates strategy at TD Securities in New York. “He said the labor market has a long way to go.”
Republican lawmakers asked Powell to explain how monetary policy could ease supply bottlenecks blamed for rising prices, or if the Fed’s bond buying was distorting financial markets.
Powell said that he would be watching to see if labor supply increases as enhanced unemployment benefits expire in coming months, adding that he was willing to look through the current shortages, and effects on wages and prices if necessary.
“Even after this supply comes, it is still likely that we will still be short of maximum employment,” Powell said. “That is why we don’t see that is time to raise interest rates now.”
Ten-year Treasuries yields edged lower to about 1.35 percent as Powell testified and US stocks closed near all-time highs.
US government data released on Tuesday showed that prices paid by US consumers last month surged by the most since 2008, increasing 5.4 percent from the same month last year.
“Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind,” Powell said on Wednesday.
He also noted that asset prices and risk appetite have risen, while downplaying any near-term risks to the economy from financial markets.
Powell’s remarks before the US Congress this week are his last semi-annual testimonies before US President Joe Biden decides whether to give him another four years at the Fed helm or pick someone else.
Powell’s tenure as chairman expires in February next year.
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