Inflation More likely to Stay Excessive in Coming Months, Fed Chair Powell Says

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Fed officials are discussing when and how to slow their $ 120 billion monthly bond purchases, which would be the first step in moving policy out of emergency mode. These discussions will continue “in the upcoming meetings,” Powell said.

Daily business briefing

Updated

July 14, 2021 at 1:29 p.m. ET

The central bank also keeps its policy rate near zero, which helps keep borrowing cheap for consumers and businesses. Officials have set a higher standard for raising this rate from rock bottom: they want the economy to return to full employment and inflation to hit an average of 2 percent over time.

The Fed’s guideline is that officials want to see inflation “moderately” above 2 percent for a period of time, and Mr Powell was asked Wednesday what that standard meant when price pressures were so strong.

“Inflation is not moderately over 2 percent – it is well over 2 percent,” Powell said of the latest data. “The question will be where this will take us in six months or so – if inflation goes down as we expect – how will the forecast work? And it will depend on the development of the economy. “

An increase in interest rates is not yet up for discussion, officials said publicly and privately. Most of the Fed’s policy-setting committee, based on its latest economic projections, does not expect borrowing costs to increase until 2023.

Given Mr. Powell’s comments, this vigilant stance is unlikely to change, economists said.

“We still do not believe that higher inflation will lead to a faster tightening of monetary policy,” wrote Andrew Hunter, senior US economist at Capital Economics, in response to Mr Powell’s prepared statement. “Asset purchases will probably not be reduced until next year and interest rates will not rise until the first half of 2023.”

The Fed is weighing the risks of higher inflation against the large numbers of people who remain unemployed. Congress has mandated the central bank to promote both stable prices and maximum employment. Although pricing pressure has increased significantly, there are still 6.8 million fewer jobs than in February 2020, the month before the pandemic layoffs began in earnest.