Powell expects bump in inflation, but says it won't get out of hand

FEDERAL Reserve chairman Jerome Powell said prices would rise this year as the pandemic recedes and Americans are able to go out and spend, but he played down the risk that this would spur unwanted inflation.

"We do expect that inflation will move up over the course of this year," he told the House Financial Services Committee on Tuesday, citing pent-up demand, supply-chain bottlenecks and the comparison with very weak price pressures last year. "Our best view is that the effect on inflation will be neither particularly large nor persistent."

Mr Powell appeared before the committee along with Treasury Secretary Janet Yellen as part of Congressional oversight of the government's response to the pandemic.

The economy is widely expected to surge in the coming months, thanks to more widespread vaccinations against Covid-19 and President Joe Biden's US$1.9 trillion stimulus package.

The programme, which passed without a single Republican vote in Congress, included additional help for unemployed workers and US$1,400 cheques for many Americans and came on top of more than US$3 trillion in fiscal support approved on a bipartisan basis last year.

In forecasts released last week, Fed policymakers projected that the economy will grow 6.5 per cent in 2021.

That would be the fastest pace since 1983 when measured fourth quarter over the same three months a year earlier and would follow a 2.4 per cent contraction in 2020 as a result of the pandemic.

Inflation, as calculated by the personal consumption expenditures price index, is seen in the Fed's median forecast as ending 2021 at 2.4 per cent. It clocked in at 1.5 per cent in January.

The 10-year US Treasury yield slid for a second day after Mr Powell played down the risks that economic growth would spur unwanted inflation. He said the experience of a prolonged period of low inflation around the world was one of the things contributing to the inertia that will keep price pressures in check.

"We have been living in a world of strong disinflationary pressures - around the world really - for a quarter of a century," he said. "We don't think a one-time surge in spending leading to temporary price increases would disrupt that." Under his forthcoming economic programme, Mr Biden plans higher taxes for those earning more than US$400,000 a year, highlighting the administration's plans to address inequality in part through levies on the wealthy.

State governments accepting pandemic-relief money from Washington are allowed to cut taxes, but only if they don't use the federal aid to offset those reductions, the Biden administration has said in a response to concerns raised by Republicans.

Dr Yellen said the Treasury is "working to provide guidelines" to say what sort of state-level tax decreases won't violate a provision in the stimulus law that says that states can't use federal grant money to pay for tax cuts. BLOOMBERG