Federal Reserve Chairman Jerome Powell’s semi-annual monetary policy testimony suggests once again that US central bank officials view the current rise in inflation to be largely transitory.
In statements prepared for his appearance before the House Financial Services committee, Powell acknowledges that inflation “has risen markedly and will likely remain high in the coming months . “
However, Powell appears to remain convinced that the recent price increase is primarily due to “production bottlenecks or other supply constraints”, and the upward pressure on prices is likely to begin to fade, or even to be invested , shortly.
That said, in light of the risks to the Fed’s forecast, which expects core PCE inflation to fall to 2.1% next year, the Fed chairman reiterates that the Federal Open Markets Committee (FOMC) “is prepared to adjust monetary policy stance as appropriate if [it sees] signs that the inflation trajectory or longer-term inflation expectations are moving materially and persistently beyond target-consistent levels. “.
“There is still a long way to go to reach the level of substantial progress”
At the same time, the top Fed official is also not concerned about the recent weakness in some economic data, saying that “household spending is increasing at an especially rapid rate” , despite recent retail sales fatigue. .
From his point of view, “the balance sheets of households and companies are quite strong, the basic financial institutions are resilient and the strong increases in employment are expected to continue in the coming months as the health crisis continues to subside.”
In his remarks, the Fed chairman insists that monetary policy will offer strong support until the recovery is complete . In this sense, he has stressed that the labor market is still far from the progress necessary to begin reducing the purchase of bonds.
“At our June meeting, the Committee discussed the economy’s progress towards our targets since we adopted our asset purchase guidelines last December. Although there is still a long way to go before reaching the level of ‘substantial progress’, participants expect the progress continues. We will continue these discussions in future meetings. As we have said, we will give advance notice before announcing any decision to modify our purchases, “said Powell.
This comment supports the view that asset purchases will likely not start to decline until next year and could again reinforce the belief that interest rates will not rise until the first half of 2023.