As prices rise at rapid pace, Fed chief seeks patience

For anyone watching with concern as prices surge for everything from food and gas to airplane tickets and clothes, the message from Federal Reserve Chair Jerome Powell over two days of congressional hearings this week was straightforward: Just give it more time and those price gains should slow, or even reverse.

The Fed chair acknowledged that the U.S. is in the midst of an unparalleled economic reopening on the heels of a pandemic-induced recession, making it that much more difficult to anticipate how things like inflation and unemployment will play out.

“This particular inflation is just unique in history,” Powell said Thursday before the Senate Banking, Housing and Urban Affairs Committee. “We don’t have another example of the last time we reopened a $20 trillion economy. We’re humble about what we understand.”

Powell is giving his twice-a-year monetary policy report to Congress. On Wednesday, he appeared before the House Financial Services Committee where he said inflation may slow “in six months or so,” suggesting a clear reading on inflation won’t come until the end of the year.

“This is the Fed saying it is prepared to endure a longer period of elevated inflation than just a few months,” Tim Duy, chief U.S. economist at SGH Macro Advisers, a consulting firm, wrote this week.

Powell aims to soothe senators and members of Congress, with Republicans in particular repeatedly raising the issue of higher prices, often blaming them on President Biden s $1.9 trillion rescue package enacted in March.

On Tuesday, the U.S. reported that prices paid by Americans surged more than they have in the past 13 years in June. Powell acknowledged that the increases have been larger than he -- and most economists -- anticipated.

He attributed the gains to a narrow set of industries that were hit hard by soaring demand and in many cases, severe supply shortages, as the nation emerged from the worst of the pandemic.

“It’s airplane tickets, it’s hotel rooms and it’s a handful of other things, and they account for essentially all of the overshoot,” Powell said.

“We think that those things are clearly temporary, we don’t know when they’ll end, but they’ll go away,” he said.

Powell admitted there are forces that could emerge that would continue to lift inflation, though he did not name any. Some economists worry that rising home prices and rents could act as a longer-term boost to consumer prices. But he said the Fed is monitoring price trends closely and will react to any such changes.

“We won’t have to wait a tremendously long time, I don’t think, to know whether our basic understanding of this is right,” he said.

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% for some time. The central bank’s policymakers have said they’re prepared to accept inflation above its target to make up for years of inflation below 2%.

Powell acknowledged Thursday that inflation is currently well above 2%, adding “of course we’re not comfortable with that.” But he noted that unemployment also remains elevated at 5.9%, and argued that the Fed doesn't want to raise interest rates to counter what it sees as temporarily higher prices.

The Fed is also purchasing $120 billion a month in Treasurys and mortgage-backed securities, which are intended to keep longer-term interest rates low to encourage borrowing and spending. The Fed has started discussing its timeframe for reducing those bond buys, Powell said, and will continue to do so at its next meeting in two weeks.

Some economists believe that the Fed will likely announce a reduction in those purchases as soon as September, though others argue a November or December announcement is more likely.

No senators endorsed another term for Powell, a contrast with the House hearing on Wednesday, when three congressmen — two Republicans and a Democrat — said Powell deserved a second four-year term.

Instead, Powell took heat from two Senate Democrats — Sherrod Brown from Ohio and Elizabeth Warren from Massachusetts — for policy decisions that they said loosened regulations on the largest U.S. banks.

“It’s time you change the way you think about regulating the biggest banks," Brown said.

Some progressive groups support replacing Powell with someone more supportive of tougher financial regulation. Powell's term ends in February, though if President Biden decides to reappoint him, that announcement could come as early as this fall.

On a separate issue, Powell said Thursday that he remained undecided on the merits of a digital dollar, also known as a central bank digital currency. A digital currency would enable faster payments among banks, consumers and businesses and potentially allow Americans to hold dollars in electronic wallets on smart phones without needing an account at a conventional bank.

"I’m legitimately undecided on whether the benefits outweigh the costs or vice versa," Powell said.