Fed’s Powell: No Pre-Emptive Rate Hikes to Combat Inflation

The Chairman of the U.S. Federal Reserve, Jerome Powell, told lawmakers on Tuesday that the economy has achieved progress on its way to recovery from the Coronavirus crisis.

The most anticipated message was about the Fed’s reaction to the surge in inflation, which as expected with Powell indicating to the House of Representatives that the central bank will not be raising interest rates too soon just to combat what it still views as a transitory inflation rise.

“We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.”

The Fed Chair believes that the recent inflation rate reading, which reached its highest level since 2008, is not a reflection of a broadly tight economy, but resulted from some segments that were directly impacted by reopening the economy amid the easing of lockdown measures.

Moreover, Powell ruled out huge sustainable inflationary pressures, similar to what the U.S. saw in the 1970s, as the Fed remains committed to price stability.

He did not, however, deny that the rise in consumer prices last month exceeded prior forecasts by the monetary policymakers. “I will say that these effects have been larger than we expected, and they may turn out to be more persistent than we have expected.”

“What we are seeing now, we believe, is inflation in particular categories of goods and services that are being directly affected by this unique historical event that none of us have ever lived through before.”

Speaking to the subcommittee on the pandemic, Powell reaffirmed the central bank’s commitment to using all its tools to ensure a broad and inclusive recovery of the job market, and not to raise interest rates too quickly based only on the fear of coming inflation.

“We will not just look at the headline numbers for unemployment.”

“I strongly suspect that labor supply and job creation will be moving up well over the rest of the year.”

Powell said that he thinks a strong job creation could be seen in the fall.