Saturday, October 23, 2021

Powell: ‘Tension’ between jobs, inflation the main challenge facing the Fed

Fed Chair Jerome Powell said Wednesday that resolving “tensions” between high inflation and still-rising unemployment is the most urgent issue facing the Federal Reserve, acknowledging that the central bank’s two goals are in potential conflict.

“This is not a situation we have faced for a very long time and it is one in which there is tension between our two objectives… Inflation is high and well above target and yet the labor market appears to be sluggish. ,” Powell said at a European Central Bank forum, a clear reference to America’s battle of “stagflation” in the 1970s that combined high unemployment and rapidly rising prices.

There are more than 5 million fewer jobs in the United States than before the pandemic. At the Fed’s most recent meeting, policymakers raised their inflation forecast for this year to 4.2 percent — more than double the target level of 2 percent. They see the pace slow down to 2.2 percent in 2022, up marginally from their previous estimates in June.

Powell said the Fed’s working “hypothesis” is that inflation will largely subside on its own as the global economy returns to normal after a rocky pandemic reopening, a baseline that will allow the Fed to head interest rate hikes. Referred to as “one way off.”

But when asked about his biggest concerns right now, Powell referred to a potential conflict between the Fed’s two goals of stable prices and full employment, a situation that could push the Fed to lower prices by both raising interest rates. may force a trade-off between At a time when it still wants to encourage job growth.

“Managing this is the top and most important priority over the next few years and it’s going to be very challenging,” Powell said in a virtual event with the heads of the ECB, the Bank of Japan and the Bank of England.

managing trade-offs

His comments are among the most direct made by the Fed chief on a topic policy makers have tried to downplay: current high inflation, if it persists, will require him to deliver on the promise of reaching “maximum employment”. before monetary policy can be forced to tighten. “And completely heal your pandemic-mark job market.

Read Also:  US inflation expectations set by economists in June

Unemployment and inflation rates are usually inversely related, partly due to monetary policy and the use of interest rates to stimulate or reduce demand for goods and services, thus influencing prices and hiring. .

This relationship seemed to weaken in recent years, with very tight labor markets and low unemployment as well as low inflation in the United States.

But the global supply shocks inflicted by the pandemic have brought back old dynamism, at least temporarily, leaving the availability of goods and services out of kilter with their demand.

The issue now is how long this dislocation lasts, and whether inflation proves to be so persistent that it outweighs job market corrections and forces the Fed to begin raising interest rates while unemployment remains high. is also more.

The risks surrounding inflation have already prompted half of Fed officials to hike interest rates from next year, and while the job market can make significant progress, Powell said in his remarks that the world’s economic The difficulties of reopening had become “disappointing”.

“It is disappointing to acknowledge that getting people vaccinated and 18 months later keeping Delta under control is still the most important economic policy,” Powell said in response to a question on the US economic outlook. “And it’s also disappointing that bottlenecks and supply chain problems aren’t getting better, in fact on the margins apparently getting a little worse.”

“We see that probably going to continue next year and keep inflation going longer than we thought,” Powell said. “But ultimately the outlook for next year between my colleagues and myself at the Fed is a pretty strong year, with growth trending up and unemployment down much lower than they are now.”

Fed officials at their meeting earlier this month downgraded their views of U.S. GDP growth for this year, but upgraded projections for next year, reflecting expectations that this year’s balance will increase. activity will be affected by supply issues and those restrictions will fade in 2022. .

by Howard Schneider

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This News Originally From – The Epoch Times

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