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23 Jun 2021
3 min read

Fed Chair Powell Reaffirms Policy, Says Inflation Will Recede

Federal Reserve Chairman Jerome Powell signals monetary support will continue. Mr. Powell play down inflation fears by paying higher prices will subside.

Fed Chair Powell Reaffirms Policy, Says Inflation Will Recede

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Key Takeaways

  • Federal Reserve Chairman Jerome Powell signals monetary support will continue
  • Mr. Powell play down inflation fears by paying higher prices will subside

Federal Reserve Chairman Jerome Powell appeared before Congress on Tuesday and said the central bank will maintain its current monetary policy course despite inflation running hotter than expected. Mr. Powell signaled challenges remain for monetary policy tightening and for the Fed to unwind its stimulus, these challenges have to be overcome.

Jerome Powell spoke at a congressional hearing before a House subcommittee on Tuesday after Fed officials last week updated their economic projections which included the first post-pandemic interest rate increase by 2023. Last week’s statement rattled the financial markets but the turbulence later subsided and the wild market gyrations calmed down while stocks moved higher. During his hearing, Fed Chair Powell took a rather dovish stance by opening with his prepared statement and saying that Fed policymakers will “do everything we can to support the economy for as long as it takes to complete the recovery”.

The inflation issue was among the main topics discussed during the hearing. Mr. Powell underscored the current inflation pressures saying they will fade over time. “If you look behind the headline and look at the categories where these prices are going up, you’ll see that it tends to be areas that are directly affected by the reopening,” he said. “That’s something that we’ll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process.”

Inflationary Forecasts on the Upside

Fed officials at their last meeting on Wednesday increased their inflation forecast for this year. They now project consumer prices to rise 3.4%, revised upward from the 2.4% forecast in March. The change was prompted by two consecutive higher-than-expected inflation readings. April’s consumer price report landed at 4.2%, while May’s report arrived at 5%, both on an annual basis.

At their last meeting, Fed policymakers vowed to maintain the current monetary support as in their view, it’s still too early in the economic cycle to perform any changes to the policy framework. “We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation,” Mr. Powell said at the hearing yesterday. “Instead, we will wait for actual evidence of actual inflation or other imbalances.”

Mr. Powell assuaged investors’ concerns by saying that extraordinary high inflation levels like those in the 70s are not a scenario that could materialize in the current market environment. “When Congress spends trillions of dollars and the Fed prints money, something’s got to give,” Rep. Mark Green (R., Tenn.) said. He turned to Mr. Powell with the question of whether recent inflation figures could turn to be “the start of something that could be as bad as the ‘70s,” when inflation peaked above 10%. Fed Chair said this is “very, very unlikely” particularly because the central bank is prepared to use all the necessary tools to prevent inflation from spiking to such levels.

The remarks of Mr. Powell offered some relief to investors who have been struggling recently in heightened market jitters. Following the speech of the Fed Chair, Wall Street benchmarks advanced with the Nasdaq Composite ending at a record high. The S&P500 is less than 0.25% away from its all-time high, while the Dow Jones Industrial Average floats roughly 3% below its peak in May.

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