WASHINGTON—Federal Reserve Chair Jerome Powell on July 15 expressed concern about inflation, stating that he and his colleagues are thinking about rising prices “night and day.”
Powell, however, said during a Senate Banking Committee hearing that the Fed’s easy monetary policy will continue as the jobs market recovery “is still a ways off.”
Powell’s testimony came on the heels of hotter-than-expected June inflation data released this week. The consumer price index (CPI) rose by 0.9 percent last month, standing at a 13-year high. In the 12 months through June, inflation was up by 5.4 percent.
Core inflation, which excludes the volatile food and energy components, also rose by 0.88 percent, more than double the consensus estimate. Year-over-year core CPI came in at 4.5 percent, standing at a 29-year high.
Producer price inflation (PPI) also accelerated to 1.0 percent in June. This was well above the consensus forecast of 0.6 percent.
During the hearing, Powell faced an intense grilling on rising prices and was questioned about the Fed’s ability to forecast the duration of high inflation.
The Fed has made it clear that it has no immediate plans to raise interest rates from near-zero levels and downsize its pandemic asset-purchase program. The central bank continues to buy at least $120 billion per month of Treasuries and mortgage-backed securities, to support the economy and the flow of credit, which is stoking asset bubble fears.
In the current environment, continuation of these policies is “puzzling,” according to Sen. Pat Toomey (R-Pa.), the ranking member of the Senate Banking Committee.
“The Fed’s policy is especially troubling because the warning siren for problematic inflation is getting louder,” he said during the hearing.
Sen. John Kennedy (R-La.) also took aim at the $3.5 trillion budget proposal introduced by Senate Democrats, saying that excessive government spending is fueling inflation expectations.
“I don’t care what they say at the Fed. We’re going to have more inflation, we’re going to start raising prices. I mean, you don’t have to be Einstein’s cousin to figure that out,” Kennedy said at the hearing.
While Fed officials continue to assure that the current increase in prices is “transitory,” consumers have a different opinion about future inflation. The New York Fed’s survey showed that median inflation expectations over the next 12 months jumped to 4.8 percent in June, reaching a record level.
President Bill Clinton’s Treasury secretary, Larry Summers, has repeatedly voiced concerns about the risk of persistent inflation caused by excessive government stimulus.
“These figures and labor market tightness and the behavior of housing markets and asset prices are all rising in a more concerning way than I worried about a few months ago,” Summers told Politico on July 13 after the June inflation reading.
Jason Furman, a top economic adviser to President Barack Obama, also raised concerns about inflation in a tweet, noting that price increases are outpacing recent wage gains.
Powell said the Fed would maintain its accommodative policies while assessing inflation threats.
“This particular inflation is just unique in history. We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” Powell said. “We’re humble about what we understand. But we’re trying to both understand the base case, and also the risks.”
He noted that the Fed closely monitors inflation expectations, as they are “central” to what creates actual inflation.
Powell also was questioned about whether the central bank’s policies are overheating the housing market.
Home prices nationwide rose 14.6 percent year-on-year in April, setting a new record, according to the S&P CoreLogic Case-Shiller index.
According to Powell, the problem in the housing market predates the pandemic. A number of factors, he said, continue to boost house prices, which include strong demand, supply constraints, as well as the Fed’s easy monetary policy that support the historically low mortgage rates.
“There’s a great deal of cash on household balance sheets,” Powell said, buoyed by low spending and fiscal stimulus during the pandemic, which contributes to the surge in house prices.
A few Fed officials have supported the idea of starting the asset-tapering debate sooner rather than later. However, they’re still in the minority. Most recently, James Bullard, president of the Federal Reserve Bank of St. Louis, urged policymakers to end stimulus measures.
“I think we are in a situation where we can taper,” Bullard told Bloomberg Television on July 15, referring to the downsizing of the Fed’s asset-purchase program.
“We don’t want to jar markets or anything—but I think it is time to end these emergency measures,” he said.