Federal Reserve chief says US stimulus to continue despite high inflation

[WASHINGTON] Even as US inflation has hit the highest rate in over a decade, the central bank is sticking to its guns, and will continue to provide stimulus until the economy has fully recovered, Federal Reserve Chair Jerome Powell said Wednesday.

Mr Powell acknowledged that the inflation spike was stronger than the Fed was hoping to see, and will remain "elevated" in coming months, but he again expressed confidence the rate will decline once supply bottlenecks and other temporary issues are resolved.

And the world's largest economy still has "a long way to go" to return to full employment following the Covid-19 pandemic, Mr Powell said in his semi-annual testimony to Congress.

The Fed "will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete," he said.

The US central bank cut the benchmark lending rate to zero at the start of the pandemic and implemented a massive bond-buying programme to provide liquidity to the economy during the crisis.

But as the economy has reopened amid the widespread availability of Covid-19 vaccines, inflation has surged, with the annual consumer price index (CPI) hitting 5.4 per cent in June, the highest since August 2008.

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Wholesale prices also are soaring, with the producer price index jumping to 7.3 per cent in the 12 months ended in June, the highest since the Labor Department began measuring in November 2010, according to data released on Wednesday.

But Mr Powell and other Fed officials have stuck to their argument that the high rates have been driven mostly by temporary issues related to the struggles to reopen the economy following the pandemic shutdowns and is not a reason to pull back on stimulus efforts.

Many private economists agree, saying inflation peaked in June, but Mr Powell faced numerous questions about prices from members of the House Financial Services Committee.

Moderating inflation

While the inflation jump was higher than officials expected, or hoped for, Mr Powell said it has been "consistent" with the dynamic the Fed has highlighted.

"The very high inflation rates are coming from a small group of goods and services that are directly tied to the reopening of the economy," he told lawmakers, pointing to demand for cars and airline travel.

The spike was driven by the "perfect storm" of high demand and low supply, he said, pointing to issues including a global semiconductor shortage that has hindered auto production, but those factors "should partially reverse as the effects of the bottlenecks unwind."

Mr Powell stressed that policymakers will not react to short-term price increases, since that would mean slowing the pace of the overall recovery.

TOO MUCH STIMULUS?

Central bankers have pledged to maintain the stimulus until inflation holds above the two percent goal and the labour market has recovered but "reaching the standard of 'substantial further progress' is still a ways off."

Asked in the hearing to describe what progress the Fed is looking for, Mr Powell said it was "very difficult to be precise" because there are multiple factors to consider.

He noted that low wage workers, African Americans and Hispanics were hardest hit by the pandemic job losses and "still have the most ground left to regain."

Fed officials have begun to discuss when they will start to taper the US$120 billion a month in bond purchases, and Mr Powell again pledged to give advance notice before making any changes.

Stock markets cheered Mr Powell's renewed assurances that easy money policies will stay in place, although major indices were off the day's high.

Republicans lawmakers pressed Powell - without success - to link rising inflation to massive government spending during the pandemic, and the US$3.5 trillion budget Democrats have proposed that includes infrastructure spending called for by President Joe Biden.

The Fed chief repeatedly dodge efforts to be drawn into the political debate, but he said, "I do think it's clear that investments in good infrastructure can add to economic potential provided the money is well spent."

AFP