With inflation risks rising, Fed Chair Powell prepares for a potential pivot

NEW YORK (Reuters) – Federal Reserve Chairman Jerome Powell said on Wednesday the US central bank needs to prepare to respond to the possibility that inflation does not abate in the second half of next year as most forecasters currently expect.

in a The second day of the certification In Congress, Powell reiterated that at their next meeting, he and fellow policymakers would consider a faster cooling of the Fed’s bond-buying program, a move widely seen as opening the door to an early rate hike.

With extremely strong consumer demand colliding with persistent supply chain problems, the Fed may be approaching a time when it must choose between seeking full employment and keeping inflation in check.

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On Tuesday, Powell said he believed inflation was likely to fall “significantly” in the second half of next year as supply chains reform, but that “the risks of higher inflation have risen.”

“We have to use our policy to address a range of reasonable outcomes, not just the most likely outcome,” he told the US House of Representatives Financial Services Committee.

As if to underscore those concerns, a survey released Wednesday by the Federal Reserve shows that businesses across the country are increasingly grappling with rising prices and struggling to fill jobs amid labor shortages, even though they are in many cases able to pass on higher costs to customers. , with little resistance. “Almost all counties reported strong wage growth,” according to the Fed’s Beige Book, an anecdotal survey of businesses in the Fed’s 12 counties. Read more

Shortly after Powell appeared in Congress alongside Treasury Secretary Janet Yellen, public health officials announced the first known US case of a patient with the Omicron COVID-19 variant, suspected to be more contagious than previous strains of the coronavirus.

Although lawmakers did not ask Powell any questions about how the new alternative might change the economic outlook or the Fed’s policy response, New York Fed President John Williams told the New York Times in an interview published on Wednesday that that could slow activity. economy and exacerbate inflationary pressures.

This frightening mix could add to the challenges Fed policymakers face as they calibrate their response to good news from a strong economy, bad news with the potential for COVID-19 to increase, and inflation that is lingering longer and staying higher than expected.

Last month, the Fed began reducing its purchases of Treasury securities and mortgage-backed securities from $120 billion a month at a pace that would put it on track to finish the purchases by mid-2022. The program was introduced in early 2020 to help nurture the economy. through the epidemic.

Powell reiterated on Tuesday that policy makers will discuss at their December 14-15 meeting whether to end this program a few months in advance in light of the strength of the economy.

tension

Powell said the recovery in the US is stronger than other major economies, thanks in part to strong fiscal support. US consumer spending surged in October, and jobless claims for the first time reached a 52-year low, prompting economists to raise estimates of fourth-quarter GDP growth.

still, Consumer confidence has declined to a nine-month low in November amid concerns about the rising cost of living and pandemic fatigue. The Omicron variant also creates more uncertainty for households and businesses.

Powell said Fed officials are monitoring the evolving economic landscape and acknowledged that they could face “stress” as they pursue the US central bank’s dual mandate to maximize employment and price stability.

“We have to balance those two goals when they are in tension, as they are now,” Powell said. “But I assure you we will use our tools to make sure that this high inflation that we are seeing does not become entrenched.”

Powell noted that wages are rising, especially for low-wage workers, and said the Fed is tracking increases.

“We’ve seen wages rise significantly,” Powell said. “We don’t see them rising at an alarming rate that would drive up inflation, but that’s something we’re watching very carefully.”

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(Jonel Marty and Lindsay Dunsmuir report); Additional reporting by Anne Sapphire and Lucia Motikani. Editing by Leslie Adler

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