Federal Reserve Chairman Jerome Powell said that a recent spell of higher inflation might last longer than central bank officials had anticipated, but he repeated his expectation that the price surge should eventually fade during a panel discussion on Wednesday.
Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December have produced a recovery like none in recent memory. Inflation has soared this year, with so-called core prices that exclude volatile food and energy categories up 3.6% in July from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains and shortages associated with the reopening of the economy.
“The current inflation spike is really a consequence of supply constraints meeting very strong demand. And that is all associated with the reopening of the economy, which is a process that will have a beginning, middle and an end,” Mr. Powell said during a moderated discussion hosted by the European Central Bank. “It’s very difficult to say how big the effects will be in the meantime or how long they last.”
Mr. Powell said the Fed sees a current surge in prices due primarily to supply-chain bottlenecks continuing into next year before fading. He said the Fed doesn’t expect the current inflation spike to “lead to a new inflation regime, in which inflation remains high year after year.”
Still, Mr. Powell conceded that the Fed faced a situation it hasn’t encountered for a very long time in which there is tension between the central bank’s two objectives of low, stable inflation together with high employment. “Managing through that process over the next couple of years is…going to be very challenging because we have this hypothesis that inflation is going to be transitory. We think that’s right,” he said. “But we are concerned about underlying inflation expectations remaining stable, as they have so far.”
The Fed would consider raising interest rates if it saw evidence that the surge in prices was leading households and businesses to anticipate that higher prices would be entrenched, fueling more persistent inflation. “We do not see evidence of that now,” he said.
Mr. Powell dismissed a question about whether the central bank was “overdoing” stimulus by delivering more support than was necessary for the economy. “The historical record is thick with examples of underdoing it,” he said. “I think we’ve avoided that this time.”
Mr. Powell signaled last week the central bank was ready to start reversing its pandemic stimulus programs in November, and the Fed’s rate-setting committee indicated it could raise interest rates next year amid risks of lengthier-than-anticipated rises in inflation.
Mr. Powell and his colleagues have signaled strongly in recent days that, so long as the economy doesn’t suffer a significant setback, the Fed will formally announce a gradual reduction, or tapering, of its monthly purchases of $120 billion in Treasury and mortgage debt at its next meeting, Nov. 2-3.
New projections released at the end of the Fed’s two-day policy meeting last week showed half of 18 officials expect to raise interest rates by the end of 2022. In June, just seven officials anticipated that, with most instead penciling in rate increases in 2023. The projections showed several officials expected somewhat higher inflation next year than they had in June and nearly all penciled in more rate increases in 2023.
A recent surge in coronavirus cases related to the more transmissible Delta variant has further clouded the outlook in recent months by potentially intensifying the challenges of slower growth and higher inflation.
“It is frustrating to acknowledge that getting people vaccinated” and getting the Delta variant under control “still remains the most important economic policy,” he said.
Fed Faces Inflation
Write to Nick Timiraos at nick.timiraos@wsj.com
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