Fed chief brushes off fears of extended inflation

Federal Reserve Chairman Jerome Powell said Wednesday that the U.S. is on track for a strong rebound from the coronavirus pandemic even as the economy hits inflationary speed bumps on the path to full recovery.

Powell spoke to reporters after the Federal Open Market Committee (FOMC) - the Fed's monetary policymaking arm - announced that it would hold its baseline interest rate range steady at 0 to 0.25 percent and continue to purchase $120 billion in Treasury and mortgage bonds each month.

During the press conference, Powell brushed off fears that the recent inflation surge would force the Fed to slam on the brakes with an interest rate hike sooner than expected. The Fed chief said that while price increases could continue to heat up, the unrepaired damage to the U.S. economy from a year of COVID-19 lockdowns made a dangerous inflation spiral unlikely.

"If we see inflation expectations or inflation moving up in a way that is really materially above what we would see as consistent with our goals and persistently so, we wouldn't hesitate to use our tools to address that," Powell said.

"We do not expect that, though. That is not our base case and in that we're joined by many other forecasters," he added.

The Fed has committed to pumping steady monetary stimulus for the U.S. economy through the end of the year as the country digs out from the hole created by the pandemic.

The debate over inflation comes as President Biden and most congressional Democrats are looking to spend big on an infrastructure package, prompting opposition from Republicans, who argue that more stimulus will only drive prices higher.

While Fed officials upgraded their projections of annual economic growth and inflation on Wednesday, Powell said the U.S. is not ready for the bank to pull back support.

"There is still a big group of unemployed people and we're not going to forget about them," Powell said.

"We're going to do everything we can to get people back into work and give them the chance to work. But there's every reason to think that we'll be in a labor market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum."

The U.S. is still down more than 7 million jobs from February 2020. Millions of Americans have still been unable to return to the workforce due to pandemic-related constraints, and many are fearful of returning to work with roughly 50 percent of U.S. adults not vaccinated against COVID-19.

Even so, higher than expected increases in several annual measures of inflation have deepened concerns among Republican lawmakers and fiscal hawks about the combination of monetary and fiscal stimulus.

"Isn't it incumbent upon the president, the U.S. secretary of Treasury, and even us in the Congress to take inflationary risk seriously by pursuing responsible fiscal policies, not just expecting the Fed to clean up a mess after the fact?" asked Sen. Chuck Grassley (R-Iowa) of Treasury Secretary Janet Yellen during a Wednesday hearing before the Senate Finance Committee.

Both Powell, a Republican, and Yellen, a Democrat who preceded him as Fed chair, say annual measures of inflation are only at decade-plus highs because of short-term kinks in the recovery. Many economists across the ideological spectrum share their view, though remain uncertain as to when exactly inflation will begin to cool.

"Partly what we're seeing is that prices, they just collapsed at the onset of the pandemic in the service sector," Yellen said Wednesday morning.

"As the economy's opening back up again, prices are now moving back towards normal levels in leisure, hospitality, airfares and the like. In most cases, prices remain below pre-pandemic levels."

Powell, speaking to reporters hours later, echoed Yellen and added that inflation was also rising because of temporary supply bottlenecks. He cited lumber prices, which shattered record highs in April and May before nose-diving this month and suggested the same would soon happen to rental car prices.

"The timing of that is pretty uncertain and so are the effects in the near term, but over time it seems likely that these very specific things that are driving up inflation will be temporary," Powell said.

Powell went on to say it was important to stay "humble" as the U.S. recovers from an unprecedented shutdown and continues to struggle through pandemic-related constraints. The U.S. has added an average of 540,000 jobs over the past three months, a solid pace but well below the 1 million-plus monthly gains many economists anticipated over the summer.

Powell attributed the hiring struggles to concerns about returning to public-facing work, a lack of school and child care options for parents and expanded federal unemployment benefits. He added, however, that all three would fade into the year as vaccinations picked up, enhanced jobless aid lapsed and schools fully reopened.

"It's just a unique situation, and we need to see how things evolve in the coming months," he said.