Powell says ‘inflation is much too high’ and the Fed will take ‘necessary steps’ to address

Jerome Powell is the Chairman of U.S. Federal Reserve and addresses an online-only news conference. The frame was taken from U.S. Federal Reserve video that was broadcast live from Washington (U.S.A), January 26, 2022.
U.S. Federal Reserve | via Reuters

Federal Reserve Chairman Jerome PowellOn Monday, he pledged tough action against inflation that he claimed jeopardizes a strong economic recovery.

The central bank chief stated in prepared remarks for National Association for Business Economics that the labor market was very strong and that inflation was much too high.

This speech is less than a week following the election. the Fed raised interest ratesIn an effort to combat inflation, which is at its highest point in over 40 years, the government has taken measures for the first-ever time in three years.

The Federal Open Market Committee reiterated Wednesday’s position. in its post-meeting statementPowell indicated that interest rate increases would go on until inflation is under control. Powell said that the rate increases could go higher than the quarter percentage point increase approved at the meeting.

“We will do everything necessary to bring about price stability,” he stated. “In particular, if the Federal Funds Rate is increased by over 25 basis points, at any meeting, or other meetings, it will be done so that we can move more aggressively. We will also tighten our stance if necessary beyond the common measures of neutral.

One basis point equals 0.01%. Officials from the FOMC indicated that they expect 25 basis points increases at their six remaining meetings in this year. The market is estimating a 50-50 probability that 50 basis point increases will be made at their May meeting.

Stocks slipped to their lows of the sessionFollowing Powell’s remarks, Treasury yields rose.

Inflation ‘widely under-estimated’

Inflation is caused by sudden tightening of the policy. as measured by the consumer price indexOn a 12-month basis, the Fed rates 7.9%. This is the gauge preferred by the Fed. has prices up 5.2%This puts them well in excess of the central banks 2% goal.

Powell, as he did before, attributed much of the pressures to Powell Covid pandemicSpecific factors such as an increased demand for goods and services, which supply was unable to meet. He admitted that Fed officials and economists had “widely underestimated the length of those pressures.”

Even though these aggravating elements have not stopped, Congress and the Fed provided $10 trillion of fiscal and monetary stimuli since the start of the pandemic. Powell stated that he believes inflation will return to the Fed target. However, it is time to stop the historically easy policies.

Powell stated that “it continues to appear likely that supply-side healing (as the world eventually settles into some new norm), but that timing and the scope of that relief is highly uncertain.” He was now chairman protempore while awaiting Senate confirmation. We will continue to make progress, but not assume any supply-side relief in the near future, while we are setting policy.

Powell addressed also the Russian invasion of UkraineIt said it adds to the supply chain and inflation pressures. Normal circumstances would dictate that the Fed wouldn’t alter its policy if such events occurred. He said that policymakers must be cautious about the uncertain outcome because it could have a negative impact on their ability to make sound decisions.

In normal times when inflation and employment are within our targets, monetary intervention would only be required to deal with a temporary spike in commodity price shocks. However, there is a risk that inflation will continue for a longer time, pushing long-term expectations higher than they should be. This underscores why the Committee must act quickly as I’ve described.

Powell last week indicated that the FOMC was also ready to run off some assets in excess of $9 trillion. The process could be initiated as soon as May but, he said that no definitive decision had been taken.

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