Federal Reserve Chairman Jerome Powell said on Tuesday the Fed’s inflation target had been met and the Fed would consider accelerating its cut to easy money policies in light of inflation. always high.
The announcement marks a major turning point for Powell in an inflation-fighting mode. Until Tuesday’s testimony before the Senate Banking Committee, the Fed chairman stressed the need for the Fed to move slowly and cautiously to avoid hurting the recovery by tightening too early.
“The economy is very strong and inflationary pressures are high,” said Powell. “So it is appropriate, in my opinion, to consider closing the taper of our asset purchases … perhaps a few months earlier.”
The Fed started cutting back on its monthly bond purchases this month, a process known in the financial industry as “tapering”. At the rate announced for November and December, the Fed would stop expanding its bond portfolio in June, even if it would continue to make new purchases to replace bonds as they mature.
During Tuesday’s hearing, Powell signaled that Fed officials would discuss faster cutbacks in purchases at the Fed’s next policy committee meeting in mid-December. That would put the Fed on track for a likely rate hike as early as the first half of next year.
Powell’s remarks at the hearing dispelled some confusion created by the publication of his prepared remarks the night before. Some have interpreted references to the omicron variant as a signal that the Fed will become more cautious about tightening, perhaps slowing the wind while waiting to see the impact on the economy. Others thought the references were pointing in a “hawkish” direction, signaling a more aggressive stance on fighting inflation.
When the pandemic first struck, the Federal Reserve and the US Treasury acted in concert. Monetary policy and fiscal policy have been relaxed to provide abundant liquidity to the economy, increasing income, savings, and spending with the aim of avoiding the kind of falling demand that can trigger economic recessions in unexpected shocks or crises. The economy briefly entered a very deep recession last year, but came out almost immediately once the most severe restrictions on economic activity were lifted.
This year, it became clear that the longer-term effects of the virus on the economy were on the supply side. Instead of the brief setback in supply chains and employment levels that many of the Fed expected, low labor market participation and supply chain problems persisted and even spread. Coupled with high demand for homes and goods such as appliances, cars and furniture from consumers teeming with stimulus money and low unemployment levels, this has created the conditions for high inflation and rising just as Fed officials believed inflation would subside.
The risk now is that omicron will cause plant and port closures around the world. It could also make some Americans now on the sidelines reluctant to return to the workforce. The migration of spending from goods to services could be thwarted or reversed if people turn away from dining out and travel again to avoid infection or simply the inconvenience of mask and social distancing requirements.
“The recent increase in COVID-19 cases and the emergence of the Omicron variant present downside risks to jobs and economic activity and increased uncertainty for inflation,” said Powell. “Greater concerns about the virus could reduce people’s willingness to work in person, slowing progress in the job market and intensifying supply chain disruptions.”
The idea of tightening monetary policy earlier gained bipartisan support during Tuesday’s hearing. Several Republicans, including senior panel member Senator Pat Toomey (R-PA), urged Powell to speed up the liquidation of bond purchases and move away from the central bank’s ultra-accommodative stance. They were joined by Senator Mark Warner (D-VA) on Tuesday.
“I hope you act more aggressively on this reduction,” said Warner, one of the leading moderate Democrats.
Senator Joe Manchin (D-WV) has been publicly worried about inflation and has been pushing Powell to end bond buying for months.
Asked about Powell’s previous insistence that inflation was transient, Powell insisted it had been misunderstood. The word transient was not intended to convey the idea that inflation would be short-lived, but simply that it would not lead to a permanent increase in inflation, Powell said.
“It’s probably a good time to take that word out and try to make it clearer what we mean,” he said.
For more than a year now, Powell has been emphasizing the Fed’s mandate to maximize employment, arguing that this meant not only reducing the overall unemployment rate, but ensuring that benefits were distributed more evenly. On Tuesday, Powell acknowledged that the burden of high inflation also hurts equality, saying it “places significant burdens, especially on those less able to afford the higher costs of premium commodities. necessities such as food, shelter and transportation.
Powell got the green light for a second term as Fed chairman last week from President Joe Biden. Some Fed watchers believe this may have allowed Powell to feel less pressure to continue arguing for an accommodative stance.
Stocks fell sharply on Tuesday following Powell’s hawkish stance, with the Dow Jones Industrial Average, S&P 500 and Russell 2000 each falling about 1.9%. The Nasdaq Composite fell 1.55%.
– The Associated Press contributed to this report.