Federal Reserve Chair Jerome Powell said officials should weigh removing pandemic support at a faster pace and he retired the word “transitory” to describe stubbornly high inflation, though a new COVID-19 strain remains a risk.

His comments Tuesday before the Senate Banking Committee, where both Democrats and Republicans expressed concerns about high prices, were taken as a hawkish pivot by financial markets that could deliver sooner-than-expected increases in interest rates next year.

“It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” said Powell, selected last week by President Joe Biden for another four year term as Fed chief. “In those two weeks we are going to get more data and learn more about the new variant.”

The U.S. central bank is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November to slow buying by US$15 billion a month. The next gathering of the policy-setting Federal Open Market Committee is Dec. 14-15, where they could make a decision to accelerate the tapering.

Stocks fell and the U.S. Treasury yield curve flattened as investors digested the remarks. Fed officials have consistently said they want to wrap up the taper before increasing borrowing costs from near zero, where they’ve been since the onset of the pandemic in March 2020. Traders boosted bets on how quickly the Fed will raise rates on the back of Powell’s comments.

“It now looks like it will take a deterioration in the public health situation over the next two weeks to prevent the FOMC from deciding to quicken the pace of tapering at the next meeting,” JPMorgan Chase & Co. chief U.S. economist Michael Feroli wrote in a note to clients titled “Turbo Tapering on Agenda for Dec. FOMC.” 

Powell’s comments mark a rare moment of pre-positioning by a Fed chair which signifies he probably already has broad support on the FOMC to cut back asset purchases. 

Policy makers including Governor Christopher Waller, and Fed presidents Mary Daly of San Francisco and Raphael Bostic of Atlanta, have all said they would consider a faster pace of tapering if economic data remained strong. 

The bipartisan support during the hearing for more forceful action on inflation also gave Powell political backing to speed up the taper prior to a vote on his second term as Fed chair.

The comments additionally mark an unusual pivot in his tenure, after the FOMC set the current pace of tapering just a few weeks ago. This suggests rising uncertainty inside the Fed about the “transitory” nature of current prices increases. Indeed, Powell said “it’s a good time to retire that word and try to explain more clearly what we mean.”

Powell said the word “transitory” was supposed to signal a blip in prices that “won’t leave a permanent mark in the form of higher inflation.” That view was largely based on the idea that inflation resulted from supply disruptions on everything from goods to labor. But scarcities of both are taking longer to resolve, Powell said in both his opening remarks and in response to questions.

“Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate,” he said. “It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year.”

What Bloomberg Economists Say
“The hawkish tone in Powell’s testimony today, along with the speeches of other FOMC members in the past weeks, signaled a fundamental shift within the committee -- when the Fed’s dual mandate of price stability and maximum employment comes in tension with one another, the central bank will place more weight on the first one.” 
-- Anna Wong, chief U.S. economist at Bloomberg Economics.

Powell called the sideways movement in labor force participation “surprising,” noting that officials thought that with the end of extended unemployment benefits, rising vaccination levels, and schools re-opening more people would come back to a job or look for one. 

“We all thought there would be a significant increase in labor supply and it hasn’t happened,” he said. He’ll get an update on that in Friday’s jobs report.

Powell, in his opening remarks, said that the recent rise in COVID-19 cases and the emergence of the omicron variant pose “downside risks to employment and economic activity and increased uncertainty for inflation.” But during the following question-and-answer period, the questions -- and his answers -- focused more on the accumulating evidence of elevated prices since officials met Nov. 2-3.

Embedded Image

In the week after that gathering, the Labor Department reported stronger-than-anticipated job gains for October, followed by data showing the biggest increase in the consumer price index in three decades.

“Since the last meeting we’ve seen basically elevated inflation pressures, we’ve seen very strong labor-market data without any improvement in labor supply, and we’ve seen strong spending too,” Powell said. “And remembering that every dollar of asset purchases does increase accommodation. We now look at an economy that is very strong and inflationary pressures that are high.”