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The Fed: Inflation is above what the Fed anticipated, however it would ease, Powell says

Federal Reserve Chairman Jerome Powell said again on Wednesday that he believes the sharp rise in inflation seen so far this year will ease.

"Inflation has increased significantly and is likely to remain high in the coming months before it eases," Powell said in a statement to the House Financial Services panel.

Later during the question-and-answer session, Powell said inflation had risen higher than the central bank "hoped to see".

On Tuesday, the US consumer price index rose 0.9% more than expected for June, and inflation rose from 5% to 5.4% in the 12 months ended June. The last time prices rose so quickly was in 2008, when oil hit a record $ 150 a barrel.

Powell named three factors for higher inflation: "base effects" if weak values ​​of the inflation index fall out of the 12-month calculation in the last year, production bottlenecks or supply restrictions, which led to sharp price increases after the pandemic, and a surge in demand for services in the The reopening of the economy.

"We see the same parts of the economy that are creating this inflation, it's a pretty narrow group of things that are producing these high levels," Powell said.

"Like everyone else, we are concerned that inflation will get away," said the Fed chairman.

Luke Tilley, chief economist at Wilmington Trust, said he had seen no increase in concerns about the inflation outlook in Powell's testimony.

The Fed forecasts that its preferred measure of inflation, the consumer spending price index, will decrease from 3.4% this year to 2.1% in 2022 and 2.2% in 2023.

Powell said it would be a “mistake” for the Fed to act “ahead of time” to tackle inflation, which should end up being temporary.

Some economists fear that the Fed will be slow to react to higher inflation numbers.

Former US Treasury Secretary Larry Summers said Wednesday he was even more concerned than originally about the overheating economy.

The Fed has kept its policy rate near zero and buys $ 120 billion in bonds a month to prop up the economy and keep interest rates low. Last December, the Fed said it would continue to buy assets until "significant" progress was made towards its goals of full employment and stable long-term inflation of 2%.

"While we are still a long way from achieving the 'significant further progress' standard, participants expect progress to continue," said Powell.

Minutes of the Fed's last monetary policy meeting in June showed that central bankers were debating when to slow bond purchases, but no decision was made.

"We will continue these discussions in upcoming meetings," Powell told the House Board.

Tilley said he expected Powell to use his speech in Jackson Hole, Wyo., In late August to explain exactly what "significant" advances actually mean. The Fed could then report on progress towards this benchmark in subsequent meetings and “announce a tapering before the end of this year or possibly as early as next year”.

"They are so aware that they no longer create a taper tantrum that this will be a slow roll towards tapering," Tilley said in an interview.

As he said at his June press conference, Powell said the Fed was ready to change its policy “if we see signs that the inflation path or longer-term inflation expectations are moving significantly and persistently above our levels Goal matches ".

Powell said he doesn't think the Fed's mortgage bond purchases would drive house prices up.

In his testimony, Powell said the job market has improved, "but there is still a long way to go". Participation in the labor market has not increased from the low rates of the pandemic, he noted.

But here too the prospects were positive,

"Employment gains should be strong in the months ahead as public health conditions continue to improve and some of the other pandemic-related factors that are currently weighing on them decrease," Powell said.

The Fed chairman said the central bank continues to monitor the financial system for vulnerabilities like asset bubbles.

Powell did not sound alarmed, however, saying that "household balance sheets are on average quite strong, corporate debt has declined from high levels and the institutions at the core of the financial system remain resilient".

Later on Wednesday, the Fed's Beige Book report on the current economic climate called growth "robust".

Powell also said that sometime in early September the Fed would issue a pivotal report on a proposed digital dollar. Powell said stablecoins could be part of the "payments universe" but need an appropriate regulatory framework first. The Fed doesn't think crypto assets will be part of the payment system, he added.

US stocks were mixed on Wednesday, with the Dow Jones Industrial Average
DJIA,
+ 0.13%
and S&P 500 index
SPX,
+ 0.12%
closes higher while tech-heavy NASDAQ
COMP,
-0.22%
Index slipped.

The yield on the 10-year government bond
TMUBMUSD10Y,
1.345%
remains well below the high of 1.75% reached at the end of March.

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