Federal Reserve Chair Jerome Powell admitted during a panel discussion that the Fed lacks understanding about inflation, which is at a 40-year high in the United States.
“I think we now understand better how little we understand about inflation,” Powell said at the European Central Bank’s annual policy forum in Sintra, Portugal, on Wednesday. “This was unpredicted,” he added.
In May, the U.S. annual inflation rate swelled to 8.6 percent, surpassing the market estimate of 8.3 percent.
On a month-over-month basis, the consumer price index (CPI) rose by 1 percent according to the Bureau of Labor Statistics (BLS).
“Is there a risk that we would go too far? Certainly there’s a risk, but I wouldn’t agree that it’s the biggest risk to the economy, I think the bigger mistake to make, let’s put it that way, would be to fail to restore price stability,” Powell said.
According to macroeconomic analyst Luke Gromen, the Federal Reserve is likely to continue to print considerable amounts of money in order to avoid the possibility of a government bankruptcy.
In addition, Powell said he sees it “likely” that the forces of de-globalization escalate, leading to standards where higher inflationary pressure and slower economic growth is normalized.
“We’ve lived through a period of disinflationary forces around the world—this is globalization, aging demographics, low productivity, technology enabling all of that,” the Fed chief said, saying it was a world where inflation was “not a problem” in general as for the majority of advanced economies.
“Since the pandemic, we’ve been living in a world where the economy is being driven by very different forces, we know that,” he continued, noting that what remains unknown is whether things will go back to a prior disinflationary environment and, if so, to what extent.
“We suspect that it will be kind of a blend,” Powell said.
The Federal Reserve has the legal duty to strive for maximum employment and stable prices. If inflation keeps going up, people with savings in cash and government bonds will be the most affected.