Are we there yet?
Like a dad on a road trip with small children, Federal Reserve Chairman Jerome Powell seems to be continually reassuring lawmakers and investors that the United States economy hasn’t quite recovered fully from the coronavirus blow and that some inflation along the way won’t derail the recovery.
But like impatient kids, not everyone is soothed by the US central bank chief’s words, no matter how many times he says them. And some analysts fear there could be tantrums ahead.
In testimony before the House of Representatives Committee on Financial Services on Wednesday, Powell reaffirmed the Fed’s commitment “to achieving the monetary policy goals that Congress has given us: maximum employment and price stability”.
To that end, Powell reiterated that the Fed is going to keep its easy-money policies in place even as inflation exceeds its two percent target rate for a while if that is what it takes to heal the nation’s jobs market from the ravages of the coronavirus pandemic.
“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell said in his prepared remarks.
Fed officials have repeatedly said that they believe surging inflation is a temporary consequence of supply bottlenecks for raw materials and labour forming as COVID-19 restrictions are lifted, consumers unleash pent-up demand, and businesses around the country gear up operations.
Powell also said part of the temporary boost in inflation is due to “the sharp pandemic-related price declines from last spring drop[ping] out of the 12-month calculation”. In other words, comparing the low prices at the height of the pandemic in the US to today’s increased demand is making the inflation problem look worse than it is.
But investors haven’t been fully assuaged by Powell’s ongoing request for patience in the recent past. Wall Street closed lower Tuesday even as big corporations and banks reported high third-quarter earnings. The fear is that even higher profits won’t insulate major firms from inflation fallout.
Those fears aren’t unfounded. Consumer prices soared 0.9 percent last month after rising 0.6 percent in May, the US Department of Labor said, the sharpest one-month change since June 2008, when the US was mired in the Great Recession of 2007-2009.
Producer price increases are breaking records too, spurring concerns that businesses could pass even higher prices on to consumers in July. Producer Price Index data released on Wednesday ahead of Powell’s testimony showed that the prices businesses fetch for goods and services increased 1.0 percent in June after rising 0.8 percent in May, according to the Department of Labor.
Over the past 12 months, producer prices rose 7.3 percent in June – the steepest advance since annual numbers were first crunched back in November 2010.
The concern from some investors is that the Fed is running the US economy too hot — pumping too much money in even as the recovery seems to have taken hold.
Investors are also worried about what might happen when the Fed’s current rate of bond-buying ends, which is why Powell reassured lawmakers Wednesday “we will provide advance notice before announcing any decision to make changes to our purchases”.
That reassurance is meant to prevent what is known as a “taper tantrum” – the collective panic that ensued in 2013 when then-Federal Reserve Chair Ben Bernanke announced the Fed would reduce its bond purchases, sparking fears among investors that bond prices would fall as a result, potentially having a negative ripple effect on the larger stock market.
Powell has focused his tenure at the Fed on being predictable to avoid just those kinds of ripples.
Another point of contention with some lawmakers is the $300 federal weekly top-up to state unemployment benefits, part of an ongoing COVID-19 relief bill passed by the administration of US President Joe Biden and expected to last until September.
Critics of the policy say it’s keeping people from going back to work, especially in hard-hit sectors like the tourism and hospitality industries. Dozens of states, mostly led by Republican governors, have already moved to end the benefit in an effort to get people back to work.
Powell acknowledged the progress that has been made in the labour market’s recovery in his testimony on Wednesday, but said there is still work to be done.
“Labour demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones,” Powell said.
“Indeed, employers added 1.7 million workers from April through June. However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labour market has not moved up from the low rates that have prevailed for most of the past year,” he added.
Proponents of the $300 federal top-up maintain that it staved off a far worse crisis, putting money in people’s pockets to spend at businesses that could have otherwise gone under. But whether that support is still needed is the subject of continued debate.
Powell, however, has been clear that he and his fellow policymakers want the labour market to fully recover before they start hiking interest rates again. And while the US isn’t there yet, he isn’t pulling off the highway no matter how much whining he hears.
“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” Powell said, adding “We at the Federal Reserve will do everything we can to support the recovery and foster progress toward our statutory goals of maximum employment and stable prices.”