WASHINGTON (NWN) — If you find the current economy a little confused, don’t worry: so does Federal Reserve Chairman Jerome Powell, the nation’s top economic official.
In a much-anticipated news conference on Wednesday, Powell said the Fed was sticking to its baseline economic forecast: COVID-19 will eventually fade, which in turn will enable supply chain bottlenecks to be overcome. More people will return to the workforce, the economy will strengthen and inflationary pressures will be less.
And yet the country’s leading economic figure acknowledged that it is not at all clear when or even whether things will play out the way he and other Fed officials hope. And so far, they haven’t. The Fed will not gain a clear view of inflation and the job market, Powell suggested, until COVID-19 and its economic consequences — less travel, less spending, shortages of supplies and labor — and ease. .
“We hope to gain more clarity on where this economy is headed and what the characteristics of the post-pandemic economy are in the first half of next year,” he said.
It’s a view that Powell has maintained, even as inflation has hit a three-decade high, burdening households who are overpaying for food, rent, oil and other necessities. In his remarks on Wednesday after the Fed ended its latest policy meeting, Powell acknowledged the hardships many households have had from higher prices.
“People who are living paycheck to paycheck or are seeing high grocery costs, high gasoline costs … we totally understand what they’re going through,” he said.
In the meantime, the Fed said, it will begin trying to counter those inflationary pressures by reducing it from $15 billion a month to $120 billion in monthly bond purchases starting this month. Those purchases launched last summer are aimed at halving long-term interest rates for borrowing and spending. With the economy recovering, they are no longer needed, Powell suggested.
The Fed may change the pace of its tapering, it said in a statement. For example, if inflation turns bad, it can accelerate cuts. But if it continues at the same pace, the bond purchases will end by June. This would likely allow the Fed to raise its benchmark short-term rate, which affects a wide range of consumer and business loans and is now pegged at zero as of that month.
Some economists and investors expect the Fed to do the same. Raising rates in June would be much earlier than recently expected this summer, when Fed policymakers predict they won’t do so until the end of 2023.
In his press conference, however, Powell downplayed the possibility of a rate increase any time soon. He said unemployment was still very high, with 5 million fewer people working than before the pandemic. That observation suggested that Powell would like to keep rates low until unemployment is as close to its pre-pandemic level of 3.5%.
Yet in another sign of the economy’s many uncertainties, he also acknowledged that recent hiring hasn’t been as strong as he had hoped. With schools back in session last month, and the $300-a-week federal jobless benefit deadline looming, Powell and most economists expected many more people to start taking jobs in September. Instead, that month’s hiring fizzled out.
“I think there is room for complete humility here,” the Fed chairman said. “We are learning right now, we have to be humble about what we know about this economy.”
“It is quite difficult to predict the economy in normal times,” he continued. “When you are talking about global supply chains in turmoil, it is a completely different thing. And you’re talking about a pandemic that’s taking people out of the labor force for reasons we don’t have a lot of experience with. So it is very difficult to predict and policy setting is not easy.”
Powell said the Fed will not hesitate to rate rates if inflation picks up, or if consumers and businesses begin to expect higher prices, which could become a self-fulfilling trend. For example, if companies expect higher costs, they will raise their own prices in response.
“For now, (the risk) appears to be skewed towards higher inflation,” he said. “We should be in a position to take action if it is necessary or appropriate to do so.”
Still, Eric Vinograd, an economist at the Asset Manager Alliance Bernstein, said Powell’s comments seem to suggest that he sees problematic inflation as a “fictional rather than a real phenomenon.”
“The Fed clearly does not think that inflation is likely to remain at or near current levels, nor does it think that the labor market is back to full employment,” Vinograd said. “They do not intend to raise interest rates unless they are convinced that inflation is too high, that inflation expectations have become uncontrollable or that the economy is at full employment.”
Powell said the high prices could last until the end of next summer. But he stuck to the Fed’s view that he was likely to fall after that. He also said that big wage increases Many Americans haven’t let inflation go further in recent months. The July-September period saw the biggest increase in wages and salaries compared to a year ago in at least 20 years.
The central bank has been trying for a long time to boost the economy and encourage hiring one focused on addressing inflation. The Fed now faces the delicate task of shutting down its ultra-low-rate policies, which it hopes will slow inflation, do it so rapidly without weakening or even weakening the job market. That to cause another recession.
The economy has recovered from the pandemic slowdown, although growth and recruitment The July-September quarter declined, partly because a rise in Delta cases discouraged many people from traveling, shopping and eating out. Many economists say they are optimistic that job growth in October will be offset by the weak pace of September, with an increase in vaccinations and the disappearance of the delta wave. The October jobs report will be released on Friday.
The Fed meeting comes as Powell’s future as the Fed chair remains uncertain. President Joe Biden has yet to announce whether he will re-nominate Powell for a further four-year term. Powell’s current term ends in early February, but past presidents have usually announced such decisions in late summer or early fall.