Powell’s warning to Congress: Inflation a ‘severe threat’ to jobs

The Fed, which has poured trillions of dollars into markets to fuel lending and spending, is already starting to withdraw that support as costs rise, unemployment drops and the coronavirus pandemic persists with record numbers new cases.

Powell spoke to lawmakers at the Senate Banking Committee during the confirmation hearing on how the central bank will chart a course to lower inflation without stifling a promising labor market recovery and scaring the markets financial.

Here are some key moments:

Inflation, inflation, inflation

Powell has repeatedly stressed that high inflation is a priority for the Fed. Under his leadership, the central bank reoriented its efforts to ensure that as many workers as possible benefit from economic growth. To do this, the Fed had promised not to hike rates until inflation arrived, so as not to slow hiring and wage increases.

But now inflation is higher and the Fed chief says it is also a risk for workers.

“If inflation becomes too persistent, if these high levels of inflation take hold in our economy and in the thinking of people, then inevitably it will lead to a lot of [higher rates] from us, ”he said. “And that could lead to a recession, and that would be bad for workers. So really, achieving maximum jobs, by which we really mean continuous progress in hiring and participation, will require price stability. “

“High inflation is a serious threat to the achievement of as many jobs as possible,” he added.

These delicate supply chain issues

The Fed believes inflation is being fueled in large part by production and shipping delays that escalated during the pandemic, thanks to plant closings and worker shortages. Powell said he still expects these issues to subside eventually, but it’s unclear how quickly that will happen, which could mean higher inflation for longer.

“The constraints on the supply side have been very persistent and very long-lasting,” he said. “We don’t really see much progress.

He said inflation was also being spurred by a strong appetite for commodities – something the Fed would seek to curb through interest rate hikes. But he said he still hoped the supply would increase as well, creating a healthier dynamic that puts supply and demand in sync. “I don’t think we’re looking to get all of the realignment of demand and supply through the demand channel,” he said.

Uncertainty carried by the Covid

In December, Fed officials forecast three rate hikes this year, although investors have also started to consider the idea that the central bank may need to act even more aggressively. It depends on the extent to which inflation begins to fall on its own.

“We’re going to have to be both humble and a little nimble here,” said Powell. “We’re going to learn a lot about the trajectory of inflation, especially with regard to these supply-side lockdowns, in the first six months of the year.”

As part of that humility, he acknowledged that it is not clear how long this pandemic will continue to dominate the lives of Americans. “Overcoming the pandemic is the most important thing we can do,” he said.

Yet the unemployment rate has now fallen below 4% and the economy is growing at its fastest rate in decades. Powell said he expected any impact on economic growth from the Omicron variant to be short-lived, based on projections that it will peak in a month. “What we are seeing is an economy that works throughout these waves of Covid,” he said.

Ultimately, the number of rate hikes coming this year “will depend on the data.” “Honestly, we don’t know,” he added, saying there was potential for growth and inflation to speed up or slow down.

Optimism about employment

Powell’s message from the labor side was optimistic: “We are approaching employment very quickly or at the maximum. This basically means that workers currently have a lot of influence over where they work and how much money they make.

This is a key consideration for the Fed. It is part of the job of the central bank to make sure that employment is as high as possible without leading to too high inflation.

But it also means the Fed believes it’s not just supply shortages that could exacerbate inflation in 2022. The more people employed, the more wages rise as companies have to compete for workers. This is a positive development, provided it accompanies a more productive economy. If higher wages cause companies to raise prices, it could trigger a feedback loop that pushes inflation up.

The central bank has also not forgotten the millions of people who were employed before the pandemic but who are now on the fringes of the workforce. Powell said it will take time to recover all of these people, who may not be working because they are sick or do not have enough child care.

“To get the kind of very strong job market that we want… it will take a long expansion,” he said. “To achieve a long expansion, we will need price stability.”

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