Federal Reserve Chair Jerome Powell sounded a note of heightened concern over persistently high inflation as he made clear that the central bank will begin tapering its bond purchases shortly but remain patient on raising interest rates.
“The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said Friday during a virtual panel discussion hosted by the South African Reserve Bank and moderated by Bloomberg’s Francine Lacqua.
“I would say our policy is well-positioned to manage a range of plausible outcomes,” he said. “I do think it’s time to taper and I don’t think it’s time to raise rates.”
Powell and his colleagues on the policy-setting Federal Open Market Committee are expected to announce at their Nov. 2-3 policy meeting that they will begin winding down the bond-buying program put in place last year in the early days of the pandemic.
Currently, the Fed is acquiring US$120 billion of Treasuries and mortgage-backed securities each month, and the coming reduction in the pace of purchases will mark the central bank’s first step toward the exit from the monetary support measures rolled out in 2020 to shield the economy from the effects of the coronavirus.
The Fed chair was speaking on the final day before monetary policy makers enter a media blackout period ahead of the FOMC’s upcoming meeting. Fed-watchers homed in on his characterization of growing inflation risks at the end of a week when measures of inflation compensation in financial markets rose to multi-decade highs.
“Powell sounded less anxious about employment and more anxious about inflation,” said Neil Dutta, head of economics at Renaissance Macro Research in New York. “He is not really leaning against the market pricing, which is revealing in and of itself.”
Investors increasingly expect Fed officials to begin raising their benchmark interest rate, which is currently just above zero, as soon as the middle of next year.
The timeline for expected rate increases has been pulled forward in money markets in recent weeks amid unfavorable news about inflation, which is running well above the central bank’s 2 per cent target amid global supply-chain disruptions that are boosting prices for a wide range of goods and services.
“It has been decades since the Fed actually chased inflation,” said Diane Swonk, chief economist at Grant Thornton LLP. “It is time the Fed acknowledge the surge in inflation has been larger and lasted longer than they hoped.”
‘Most Likely Case’
The Fed chair said the risk is that the current elevated rates of inflation “will begin to lead price- and wage-setters to expect unduly high rates of inflation in the future,” which could ultimately force the Fed to respond. But he added that it was “still the most likely case” that inflation would come down as supply-chain constraints ease, “as they eventually will.”
“If we were to see a serious risk of inflation moving persistently to higher levels, we would certainly use our tools to preserve price stability while also taking into account the implications for our maximum employment goal,” he said.
The number of Americans currently employed is still millions below where it was just prior to the pandemic, and the pace of rehiring slowed in August and September as the delta variant swept across the country. Fed officials see the level of job gains accelerating in the coming months as the latest wave of cases subsides.
“It would be premature” to “tighten policy using rates now with the effect and intent of slowing job growth when there’s good reason to expect a return to robust job growth and for the supply constraints to diminish, both of which would have the effect of increasing the potential output of the economy,” Powell said.