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16 Jul 2021
3 min read

Fed’s Powell Admits Inflation Larger Than Predicted, Futures Flat

Fed’s Powell Admits Inflation Larger Than Predicted, Futures Flat

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Key Takeaways

  • Wall Street stocks hover steadily in pre-market trading on Friday
  • Fed Chairman Powell says inflation is a “shock going through the system”

Federal Reserve Chairman Jerome Powell confirmed current inflation levels have climbed above the central bank’s expectations. Concluding his two-day testimony before Congress, on Thursday, Mr. Powell spoke to the Senate Banking Committee.

The Fed chief reassured the market central bankers are closely monitoring the rapid economic expansion and are ready to intervene, when necessary, and use their tools to prevent the economy from derailing from its path toward healing.

“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected or that anybody had expected. To the extent that it is temporary, then it wouldn’t be appropriate to react to that,” Chairman Powell said during his speech before lawmakers.

“But to the extent that it gets longer and longer, we’ll have to continue to reevaluate the risks that would affect inflation expectations and would be of longer duration and that’s what we’re monitoring,” he added.

Inflation Concerns Remain Predominant

The recent 5.4% jump in consumer prices for June became a reason for concern among Fed policymakers as it vastly exceeded the Fed’s target of 2%. Despite the sharp bump in inflation, the Fed Chair told the Senate banking panel it is still too early to begin the initial steps of tapering, or unwinding the monetary stimulus support.

“This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course, we’re not comfortable with that,” Mr. Powell told Congress on Thursday.

Jerome Powell kept his viewpoint that higher inflation pressures are a product of one-time increases in the prices of a number of services that have surged as a result of the quick economic reopening. Factors such as higher rates of hotel services and air travel are considered major drivers of prices. According to the central bank chief, once the economy cools down, these factors will no longer play a major role and inflation will be brought back closer to Fed’s target.

“This particular inflation is just unique in history. We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” he said. “We are humble about what we understand.”

Federal Reserve officials will renew their discussions in their upcoming July 27-28 meeting. They are expected to accelerate talks about gradually reducing their asset purchase scheme of $120bn a month in Treasury and mortgage securities.

Markets are calm about the anticipated tapering because Chair Powell has made it clear that ample warning will be provided well in advance before the process has started.

Meanwhile, US equity futures are moderately higher after they were under pressure in overnight trading earlier. Futures tied to the major benchmarks are all just above the flatline on Friday, following a choppy trading session on Thursday.

Bitcoin and cryptocurrencies are trading to the downside on Friday as uncertainty continues to weigh over the digital asset market. The flagship token is now trading below $32,000, down about 1% on the day. Ether is also lower today, currently hovering around $1,900 per coin.

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