Federal Reserve Chairman Jerome Powell told Congress on Tuesday that inflation was proving more difficult to contain while the economy was still showing strength.
“Inflation has moderated in recent months, but the process of bringing inflation down to 2% is still a long way and likely to be bumpy,” Powell said in his opening remarks. He added that an increase was “likely”. higher than previous forecasts.”
The sobering comment comes as the Federal Reserve hikes interest rates to multi-year highs, proving the economy, especially the labor market, is more resilient than expected.
Republicans on the Senate Banking Committee used the opportunity to denounce the Biden administration’s rise in inflation, that they oppose domestic energy production, and that South Carolina Republican Tim Scott has “woke up.” He cited what he called a “progressive agenda.” .”
Democrats, by contrast, sought to highlight the effects of the war in Ukraine, the COVID-19 pandemic, and corporate greed as major drivers of inflation.
“There are many anomalous factors and I don’t think anyone knows how this will play out,” Powell said.
As expected, the announcement provided an opportunity to reaffirm the Fed’s commitment to fighting inflation.
In a speech in Washington last month, Powell said disinflation had begun, but so far it was mostly confined to the goods sector of the economy. said it was looking for further evidence of a cooling in the area.
Powell also reiterated that the job market remains tighter than the Fed had hoped, pushing wages above what is in line with the overall target of 2% annual inflation.
Political comics about the economy
Most recently, Powell said in the Fed’s monetary policy report issued on Friday that “core commodity price gains slowed significantly in the second half of last year as supply chain bottlenecks eased.”
“Among core service prices, housing services inflation has been high, but the slowdown in new tenant rent growth late last year points to lower housing services inflation over the next year,” the Fed said. “But for other services, price inflation continues to rise and the outlook for lower inflation may depend in part on an easing of tight labor markets.”
January’s employment numbers were much higher than expected, adding 517,000 jobs, partly reflecting an annual adjustment in data and warmer-than-usual weather. The Labor Department will report his February employment figures on Friday, releasing a consensus forecast of an increase of 215,000 jobs, although some economists are forecasting a higher figure.
Other economic indicators were stronger than expected in the first half of the year, with many analysts still predicting a recession, but the timing has been postponed.
Powell likes to say the Fed relies on data, but data is volatile. Improved inflation and a slower pace of economic growth in the second half of 2022 have reduced the amount of the January rate hike, but data since then have shown stronger levels of consumer spending and retail sales. is shown.
Then worse-than-expected inflation data arrived. The market reacted with talk of a bigger rate hike when the Fed meets later this month, with some Fed officials expecting a 0.5 percentage point hike instead of the quarter percentage point most economists expect. said he was satisfied with the
Dave Gilbertson, vice president of payroll firm UKG, said:
“By and large, we are heading in exactly the direction that the Fed wants,” Gilbertson said.
Powell attempted to walk a fine line between these expectations, emphasizing that the Fed will do what it needs without committing to anything concrete.
Meanwhile, bond yields have surged in response to the idea that the Federal Reserve (Fed) will raise interest rates and hold them there longer, with 10-year Treasuries recently breaking above 4%. Did.
The possibility of a recession is also plaguing the Fed, especially later this year or if the presidential election cycle is delayed until looming 2024, as Chairman Powell gives his semi-annual congressional testimony on Tuesday and Wednesday.
Essentially, the Fed is stuck in a policy and political vise that seeks to slow inflation, and the Fed is achieving its goals without slowing the economy to the point of entering a recession. This is more dangerous as the economy continues to show greater-than-expected resilience, given that the Federal Reserve (Fed) has raised interest rates from near zero to 5% over the course of his year. It’s a tightrope walker.
“The Fed is committed to helping the economy transition smoothly from the post-pandemic reopening phase (which grew 5.9% in 2021 and 2.1% in 2022) to a more sustainable rate that does not cause inflation or stall economic growth. We want to tighten monetary terms,” Jeffrey Roach, chief economist at LPL Financial, wrote on Monday.
“If the economy manages to stem inflation without a deep and prolonged recession, investors are likely to see less market volatility and better conditions for both bond and equity investors,” Roach said. added. “Despite unexpected global shocks, we believe the economy will eventually pick up momentum. If that happens, we expect equity investors to benefit.”