WASHINGTON: Federal Reserve Chairman Jerome Powell on Wednesday defended the ultra-low interest rate policies he has adopted since the end of the pandemic more than 18 months ago.
But he acknowledged that inflation has been around longer than he expected.
In a panel sponsored by the European Central Bank, Powell was asked whether the Fed was overtaxed with a policy of slashing its short-term interest rate to nearly zero and buying $120 billion per month in bonds to lower long-term rates. Used to be.
Powell replied that the historical record is thick with examples of reducing it. And almost every cycle, we just overestimate the damage and need to react. I think we have avoided it this time.
However, criticism of the Fed’s policies has grown in recent months as inflation hit a 30-year high. The economy’s main challenge, meanwhile, has shifted from weak demand as a result of widespread layoffs, which the Fed can help combat with lower interest rates, to supply shortages, of which the Fed can do little. Is.
When consumers started spending more this spring and summer, prompted by stimulus checks, many businesses were caught off guard, and shortages of cars, furniture and electronics quickly materialized. It pushed inflation to 4.2% in July from a year earlier, according to the Fed’s preferred measure.
Powell initially called such inflation transitory and said it would fade as the economy reopens and supply chain kinks worked out. In recent comments, however, that detail has faded.
Several supply bottlenecks remained, with ships being supported at major West Coast ports. And the shortage of chemicals is now driving up the prices of a wide variety of goods, from plastics to paints.
Powell said it’s disappointing to see bottlenecks and supply chain problems not getting better, in fact, on the margins, apparently getting a little worse.
Powell concluded that we see that likely continuing over the next year and that inflation has sustained longer than we thought.
Still, Fed officials predict inflation will drop over the next 12 months to just 2.2% by the end of 2022.
Powell also said that the delta variant of the coronavirus has slowed the US economy and hiring. Job gains in August were about one-fourth of June and July levels.
He said it was disappointing to acknowledge that getting people vaccinated and 18 months later getting Delta under control is still our most important economic policy.
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