“Inflation has risen dramatically and will likely remain high for the next few months before moderating,” Powell said in prepared remarks released ahead of a hearing at the House financial services committee on Wednesday.
He added that the Fed “would be prepared to adjust the stance of monetary policy as appropriate if we saw any signs that the inflation path or longer-term inflation expectations were shifting significantly and persistently. beyond levels compatible with our objective ”.
Powell’s comments follow data showing that the U.S. Consumer Price Index rose 5.4% in June from a year ago, which rekindled concerns about the overheating of the American economy.
The numbers could increase pressure on the U.S. central bank to begin the process of slowing down the large doses of monetary support it provided to the economy during the pandemic more quickly, starting with a $ 120 billion cut. dollars in monthly asset purchases.
Although Powell noted the higher inflation figures and insisted that the Fed would not be complacent about rising prices, he maintained his view that the inflation surge was big. temporary part, which is shared by many central bank officials.
“Inflation is temporarily stimulated by base effects, as the sharp price drops linked to the pandemic since last spring are out of the 12-month calculation,” according to Powell’s remarks.
“In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has resulted in particularly rapid price increases for certain goods and services, which are expected to partially increase. reverse as the effects of the bottlenecks dissipate.
“The prices of services that have been hit hard by the pandemic have also jumped in recent months as demand for these services has increased with the reopening of the economy,” he added.
During the hearing, Powell is expected to be pressed by Republican lawmakers to explain the Fed’s stance on inflation. Republicans are increasingly criticizing the White House and Democrats for fueling rising inflation and rising costs of living thanks to the $ 1.9 billion stimulus legislation passed in March.
Some also accuse the Fed of being complacent about rising prices and calling for the swift removal of monetary stimulus.
But many Fed officials are reluctant to act too quickly to withdraw support for the economy. The U.S. labor market is still far from its pre-pandemic employment levels, and the fallout from the global coronavirus crisis could still pose risks to the U.S. economy.
US government debt continued its rally following the publication of Powell’s testimony, with the benchmark 10-year bond trading more than 0.4 percentage point down that day to 1.37%.
Short-term Treasuries, which are more sensitive to policy adjustments, also gained. Yields on the two-year note slipped nearly 0.02 percentage point to 0.23 percent.
At its June meeting, the Fed launched a debate on the timing and terms of reducing its asset purchases, but Powell suggested a move was not imminent. The Federal Open Market Committee said it would need “further substantial progress” from last December on its full employment and price stability goals to take action.
“While still a long way from meeting the standard of ‘substantial further progress’, participants expect progress to continue,” the Fed chairman said in his prepared remarks. “We will continue these discussions at future meetings. As we said, we will notify you in advance before we announce any decision to make any changes to our purchases. “