Fed Chairman Powell Plays Down Inflation, US Dollar Declines

Fed Chairman Powell Plays Down Inflation, US Dollar Declines

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Key Takeaways

• Federal Reserve chief Jerome Powell said inflation is seen as temporary
• In testimony before Congress, he said the Fed is still “a ways off” from altering policy

Federal Reserve Chairman Jerome Powell said Wednesday the central bank is still “a ways off” from altering its monetary policy aimed to boost the US economy and the stock market. His comments, part of a prepared testimony before members of Congress, presented the Fed’s well-known stance, which included continued cash injections and keeping rates at ultra-low levels for the foreseeable future.

The market was closely monitoring Mr. Powell’s speech at the semiannual monetary policy report before Congress. Following his speech, the US dollar declined broadly, while gold rallied more than $25 to levels above $1,825 per troy ounce. Choppy trading marked the session for Wall Street stocks, which ended the day mixed.

The central bank chief yesterday said the Federal Reserve is still not considering doing any changes to its ultra-easy monetary policy despite the surge in inflation. In his view, the economy needed to achieve “substantial further progress” toward the Fed’s goals, which include a full improvement in the labor market, and stable prices at a 2% rate of inflation.

Fed Asset Purchase Remains Strong

“Conditions in the labor market have continued to improve, but there is still a long way to go,” Mr. Powell told Congress. “Job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish,” he added on the topic of employment.

On the surge in inflation, the Fed Chair said inflation “has increased notably and will likely remain elevated in coming months before moderating.” He essentially downplayed current inflationary pressures by saying higher prices are “being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation.”

To allow the economy to recover, Jerome Powell vowed to continue the Fed’s current pace of asset purchases.

“We are continuing to increase our holdings of Treasury securities and agency mortgage‑backed securities at least at their current pace until substantial further progress has been made toward our maximum-employment and price-stability goals.”

The Federal Reserve is currently purchasing at least $120bn of assets a month — $80bn of Treasury securities and $40bn of mortgage-backed debt. “These purchases have materially eased financial conditions and are providing substantial support to the economy,” Mr. Powell said. He did remark, however, that Federal Reserve officials are already talking about tapering the pace of asset purchases.

“We at the Federal Reserve will do everything we can to support the recovery and foster progress toward our statutory goals of maximum employment and stable prices,” the Fed Chair said in conclusion to his prepared testimony.

Pre-pandemic levels of employment have been used by Chairman Powell as a guide for what “maximum employment” meant. While the employment rate has dropped substantially to 5.9% in June, there are still more than 7.5 million Americans in need of employment so the labor market could reach its pre-pandemic levels.