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Federal Reserve Chairman Jerome Powell said the US economic recovery has still not progressed enough to start cutting back on the central bank’s massive monthly asset purchases, while adding that inflation is expected to remain high in the coming months before moderating.
“At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidelines last December,†Powell said Wednesday in remarks to the committee. House financial services. “While still a long way from meeting the ‘substantial further progress’ standard, participants expect progress to continue. “
During the House hearing, to present the Fed’s biannual monetary policy report to Congress, Powell was pressed to know how the central bank would judge it had reached that threshold.
“It’s very difficult to be specific about this,” Powell said of the goal of substantial progress. “We’ll be providing a lot of notice as we move forward on this. “
The Fed chairman will face further questions from the Senate banking panel on Thursday.
Taper synchronization
Powell “is trying to push back on this idea that they are under pressure to exit or have decided to cut soon,” said Priya Misra, head of global rate strategy at TD Securities in New York. “He said the job market has a long way to go. “
U.S. central bankers are providing aggressive support by keeping interest rates close to zero and buying $ 120 billion in bonds per month, even as the economy grows strongly. Job gains have been solid and inflation has surged, although officials say this is due to temporary supply issues as the economy reopens after the pandemic.
Ten-year Treasury yields have hovered around 1.37%, as witnessed by Powell, and US stocks have fluctuated near all-time highs.
Critics say super-easy monetary policy coupled with massive government spending is overheating the economy. Stephen Stanley, chief economist at Amherst Pierpont Securities in New York, said the Fed’s policy committee was “making a serious policy error.”
“The crescendo of inflation is building everywhere except within” the Federal Open Market Committee, the panel of the Fed that sets interest rates, he wrote in a note to clients. “Businesses in virtually every sector of the economy are experiencing sharp increases in input costs and passing them on much more successfully than they have seen in decades. “
Government data released on Tuesday showed prices paid by U.S. consumers rose the most in June since 2008, and rose 5.4% from the same month last year.
“Strong demand”
“Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to particularly rapid price increases for some goods and services, which are expected to partially reverse at as the effects of the bottlenecks wear off, â€said Powell. “Prices for services that have been hit hard by the pandemic have also jumped in recent months as demand for these services has increased as the economy reopens. “
Powell noted that asset prices and risk appetite have increased while minimizing short-term risks to the economy of financial markets.
“Household balance sheets are, on average, quite strong, corporate debt has fallen from high levels and the institutions at the heart of the financial system remain resilient,†he said.
Powell’s remarks to Congress this week are his last biannual testimony before President Joe Biden decides whether to take him another four years as the head of the Fed or pick someone else. Powell’s term as president expires in February.
The Fed’s political patience is part of a new framework it announced almost a year ago that pledged to average 2% inflation over time and not prejudge the future. maximum employment level. In June, Fed officials struck up a conversation about when to start cutting back on asset purchases.
Forecasts released by Fed officials last month also showed they were pushing forward the timing of the interest rate take-off, with two hikes slated for 2023, a move that pushed some market measures of inflation expectations. on the decline.
“Measures of longer-term inflation expectations have risen from their pandemic lows and are within a range that is broadly in line with the FOMC’s longer-term inflation target,” Powell said in his remarks. opening remarks.
In response to a question, Powell said recent inflation readings had been “higher than expected and hoped,” but pointed out that the biggest gains came from a small group of goods and services.
On the other hand, if high inflation persisted and threatened to uproot inflation expectations, “we would absolutely change our policy as appropriate,” he said.
Fed officials signaled last month that their views on inflation risk and uncertainty have increased, they forecast.
Labor market
Powell stressed in his prepared remarks that the labor market recovery was still far from complete.
“Labor market conditions have continued to improve, but there is still a long way to go,†said Powell. “Job gains are expected to be significant in the coming months as public health conditions continue to improve and some of the other pandemic-related factors currently weighing them down diminish.”
He added that despite “substantial improvements” for racial and ethnic groups, “the hardest hit groups still have the most ground to regain.”
The US economy created 850,000 jobs in June, the largest monthly increase since August. Still, broader measures of the labor market slowdown indicate that it is still below the Fed’s mandate of maximum jobs. The unemployment rate for black workers stood at 9.2% from 6% in February 2020.
The overall unemployment rate fell to 5.9% from a pandemic peak of 14.8% with high churn rates in industries facing high demand such as retail and hospitality. Before the pandemic, the unemployment rate stood at 3.5% in February 2020 while the 12-month change in inflation was 1.8%, according to the Fed’s preferred measure, the price index. personal consumption expenditure.
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