Federal Reserve chief Jerome Powell’s inner hawk unfurled its wings again on Wednesday, a day after he told United States lawmakers it is probably time to retire the word “transitory” when describing inflation.
In a second day of testimony before Congress on Wednesday, Powell said that even though most economists see price pressures easing by the middle of next year, “We can’t act as if we’re sure of that.” He also noted that “Inflation has been more persistent and higher than we’ve expected.”
On Tuesday, US stock markets sold off and the dollar strengthened against other currencies after Powell signalled that the Fed could accelerate its unwinding of bond purchases that have helped keep a lid on long-term interest rates during the coronavirus pandemic. If the Fed does speed up its taper of bond purchases, an interest rate hike could happen sooner than expected.
The Fed has been prioritising getting Americans back to work during the recovery over keeping price pressures in check because it has viewed this year’s inflation spike as a temporary consequence of supply chain snarls and shortages resulting from businesses around the world reopening en masse.
But Powell on Tuesday signalled a shift is under way in the Fed’s thinking.
Though the US labour market still hasn’t recaptured all of the jobs it shed during last year’s lockdowns, it’s so strong that Americans are quitting their jobs in record numbers. And weekly applications for unemployment benefits have hit a 52-year low.
American firms are also struggling to fill a near-record number of job openings, with many offering raises and better benefits to lure scarce workers.
As businesses shell out more for workers and raw materials, those costs are being passed on to US consumers. In October, consumer price inflation rose at its fastest pace in 30 years.
On Wednesday, Powell reiterated the Fed sees no evidence yet of a so-called “wage price spiral” developing. That’s a cycle in which fatter paycheques lead businesses to keep raising prices, which leads workers to ask for another raise.
“We have seen wages moving up significantly,” Powell said. “We don’t see them moving up at a troubling rate that would tend to spark higher inflation, but that’s something we’re watching very carefully.”
Despite having to grapple with soaring prices, consumer spending was strong in October. But inflation is taking a toll on consumers’ attitudes about the economy’s prospects as well as their own incomes.
Consumer confidence fell in November after rising slightly the month before, the Conference Board said on Tuesday.
And now Omicron is injecting even more uncertainty into the economic outlook.