Federal Reserve Chair Jerome Powell, newly appointed for a second four-year term as chief of the central bank, said on Nov. 22 that he would use the Fed’s arsenal to prevent inflation from becoming a more permanent feature of American life.
Powell made the remarks at a White House press briefing at which President Joe Biden announced his reappointment while also nominating Lael Brainard, member of the Fed’s governing board, to serve as Federal Reserve vice chair.
“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials, like food, housing, and transportation,” Powell said, acknowledging the disproportionately high impact of accelerating prices on lower-income Americans.
“And we use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched,” he added, referring to t￼he Fed’s dual mandate of “maximum employment” and price stability.
After Biden announced the two nominations, he praised Powell’s commitment to the “maximum employment” component of the Fed’s dual mandate, while noting Powell’s role in stewarding the Fed through a “landmark review” that saw the central bank adopt a more flexible inflation targeting regime. This basically allowed the Fed to temporarily overshoot its objective of 2 percent inflation in order to pump more money into the economy to ensure a more solid labor market recovery.
“When our country was hemorrhaging jobs last year and there was panic in our financial markets, Jay’s steady and decisive leadership helped to stabilize markets and put our economy on track to a robust recovery,” Biden said of Powell.
Yet the unprecedented level of monetary stimulus—which involved some $120 billion in monthly asset purchases and dropping interest rates to near zero—along with massive fiscal measures, have also had an unwanted side effect, helping push up inflation to levels not seen in over 30 years.
“Today, the economy is expanding at its fastest pace in many years, carrying the promise of a return to maximum employment,” Powell said, with “maximum employment” a condition the Fed defines as the lowest level of unemployment the economy can sustain while maintaining a stable rate of inflation. Since there will always be some people between jobs, this rate will never be zero, and so economists generally put it at between 3 percent and 5 percent, while Atlanta Fed chief Raphael Bostic recently defined it as a condition where “every American who wants a job has one.”
Powell, echoing his oft-repeated view that pandemic-related supply-side dislocations have played a major role in pushing up prices, said, “The unprecedented reopening of the economy, along with the continuing effects of the pandemic, led to supply and demand imbalances, bottlenecks, and a burst of inflation.”
The most recent Labor Department report on consumer prices showed that inflation in the 12 months through October hit 6.2 percent, the highest pace in 31 years.
Facing a surge in inflation, the Fed has started phasing out its asset purchases at a pace of around $15 billion per month and, while central bank policymakers have said it’s not yet time for a rate hike, interest-rate futures markets are predicting the Fed will start tightening in June 2022.
Powell, along with other Fed officials, have maintained that the current bout of inflation is “transitory” and will abate once supply-side dislocations are smoothed out. Still, Powell said at a Nov. 3 press conference that the central bank’s idea of “transitory” has evolved as upward price pressures have turned out to be more persistent than previously thought.
“Really for us, what transitory has meant is that if something is transitory, it will not leave behind it permanently or very persistently higher inflation,” Powell said, adding that it is not yet time to raise interest rates as “there is still ground to cover” in terms of labor market recovery.
But with job openings near historic highs and the quits rate, which reflects worker confidence in being able to find a better job, at a record high, some economists believe it’s high time the Fed hit the brakes on easy money more forcefully.
Former Treasury Secretary Larry Summers, who was early to sound the alarm on the current bout of surging prices, said in a CNN interview several weeks ago that he believes the labor market is tight and loose monetary policy is counterproductive.
“We’ve got to recognize our problem is not that not enough people have jobs,” Summers told the outlet. “The current problem is that we are pushing demand into the economy faster than supply can grow and that we are just going to get more and more inflation until we stop doing that,” he said.
“That’s the real problem,” he added.
Unless the Fed makes a significant change to policy or an “accident” delivers a major disruptive blow to the economy, it’s “quite unlikely” the rate of inflation will fall back to the central bank’s 2 percent target in the foreseeable future, Summers predicted.
Summers also said he believes the Fed’s pace of phasing out the asset buying program is not fast enough.
“If they started by saying that they were going to stop immediately buying mortgages in the midst of a major housing bubble, that would be helpful,” he said, adding that surging housing prices have yet to be fully reflected in the headline inflation numbers.
“If they said they were going to stop growing their balance sheet and not reduce their balance sheet but just stop the process of growing it—if they were going to get that done in three months, rather than in eight, that would be helpful,” he continued.
“I think the Fed has made a significant mistake in the approach that it’s taking by doubling down on the massive fiscal stimulus we had at the beginning of the year with really easy monetary policy,” Summers added.