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Powell voices confidence in Fed's handle on inflation

Powell voices confidence in Fed's handle on inflation
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Federal Reserve Chair Jerome Powell on Wednesday expressed confidence that rising inflation would even out as the one-time, pandemic-related statistical quirks and supply chain disruptions driving it begin to fade.

During a press conference, Powell argued that the recent rise in the rate of price increases is driven almost entirely by economic activity picking back up after collapsing amid the onset of the coronavirus recession.

“We're making our way through an unprecedented series of events, in which a synchronized global shutdown is now giving away to widespread reopening of economies in many places around the world,” Powell said after the Fed announced it would hold rates near zero percent and maintain the current rate of bond purchases.

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“We are likely to see some upward pressure on prices,” he continued, “but those pressures are likely to be temporary as they are associated with the reopening process.”

Republican lawmakers, some centrist Democrats and other inflation hawks have criticized both the Fed and Biden administration for not sharing their alarm on the potential of the U.S. economy overheating.

The U.S. is expected to see growth between 6 and 8 percent in 2021 as it contains the spread of COVID-19 and brings millions of people back to work. Critics fear that Biden’s recent $1.9 trillion economic aid bill, plans for future spending and loose Fed monetary policy will spur rampant inflation as the U.S. is already booming.

The consumer price index (CPI), a closely watched gauge of inflation, rose 2.6 percent between March 2020 and last month, and 1.7 percent minus food and energy costs. The Fed’s annual target for inflation as measured by a different federal index is 2 percent.

“I am worried that we are over stimulating the economy in the short run,” said former Treasury Secretary Larry Summers in an interview during The Hill’s "Future of Jobs Summit.”

“I do think we need to be really quite vigilant about overheating, the economy, and not simply celebrating all the demand,” he said.

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Powell, a Republican, said Wednesday that inflation would rise further over the summer, but because of two short-term factors: The statistical effect of comparing a collapse in demand to a sharp increase in demand and bottlenecks created by the reopening global economy.

Annual measures of inflation for March and the following months will come in march higher due to “base effects,” Powell said, which add 1 percentage point to inflation readings. Because prices fell so sharply amid the onset of the pandemic, he explained, the higher rates of inflation reflect prices returning toward pre-COVID-19 levels.

Powell added that difficulties meeting a sharp increase in demand for certain supplies and goods has forced manufacturers and shipping companies to raise their prices.

“An episode of one-time price increases as the economy reopens is not the same thing as and is not likely to lead to persistently higher year over year inflation into the future,” he said.

Even so, he ceded that while “we know that the base effects will disappear in a few months, it's much harder to predict, with confidence, the amount of time it will take to resolve the bottlenecks” or “the temporary effects that they will have on prices.”

Inflation has lingered below the Fed's target range for more than a decade and many economists, including within the Biden administration, share Powell's confidence that it will remain in check. The Fed last summer also adopted a new framework that calls for allowing inflation to run slightly above its 2 percent target range to make up for years of undershoots.

While high and steadily rising inflation is dangerous, economists consider a baseline level of moderate annual price and wages increases to be indicative of steady growth. Higher inflation also allows the Fed to increase interest rates in times of economic prosperity, giving it more room to cut when the economy turns south.

Powell reiterated Wednesday that the Fed will not raise interest rates or taper its monthly bond purchases until the economy reaches maximum employment, 2 percent annual inflation and is on track to slightly exceed the Fed's inflation target.