Powell Says Inflation Will Likely Remain Elevated Before Modulating, Fed Keeps Interest Rates Near Zero

Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee, stating that inflation, which has been rising as the recovery gains momentum, "will likely remain elevated in coming months" before "moderating." Powell signaled that the Fed will not respond to short-term price spikes by raising interest rates, which could weaken the economic recovery. He reiterated his long-held view that high inflation readings are driven by temporary factors, such as supply shortages and increased consumer demand as pandemic-related restrictions are lifted.

Key Takeaways:

• Powell stated that inflation, which has been rising as the recovery gains momentum, "will likely remain elevated in coming months" before "moderating."
• The Fed will not raise interest rates in response to short-term price spikes, which could weaken the economic recovery.
• Powell reiterated his view that high inflation readings are driven by temporary factors, such as supply shortages and increased consumer demand as pandemic-related restrictions are lifted.
• The government reported wholesale prices jumped 7.3 percent in June from a year earlier, the fastest 12-month increase on record.
• Consumer price inflation surged in June by the most in 13 years, with core inflation rising 4.5 percent in June, the fastest pace since November 1991.
• The Fed has said it will keep its benchmark short-term rate pegged near zero until it believes maximum employment has been reached and annual inflation moderately exceeds 2 percent for some time.
• Powell stated that the economy is "still a ways off" from making the "substantial further progress" the policy makers want to see before they will begin reducing the Fed's $120 billion in monthly bond purchases.
• Powell drew bipartisan praise during the questioning by House members, with some lawmakers urging President Joe Biden to reappoint him to another four-year term.

Statistics:

• Wholesale prices jumped 7.3 percent in June from a year earlier, the fastest 12-month increase on record.
• Consumer price inflation surged in June by the most in 13 years.
• Core inflation rose 4.5 percent in June, the fastest pace since November 1991.
• The Fed has said it will keep its benchmark short-term rate pegged near zero until it believes maximum employment has been reached and annual inflation moderately exceeds 2 percent for some time.
• The Fed's $120 billion in monthly bond purchases are intended to keep long-term borrowing rates low to encourage borrowing and spending.
• Americans' expectations for inflation are important because they can become self-fulfilling, and businesses may raise prices to compensate for increased wages.

Sources:

• The Globe and Mail
• AP News: "Powell Says Inflation Will Likely Remain Elevated Before Modulating, Fed Keeps Interest Rates Near Zero"