Federal Reserve Chair Jerome Powell said Tuesday that the risk of “more persistent” higher inflation has grown as a spike in prices driven by pandemic-related supply and demand mismatches spreads across the economy.
Powell fielded questions about inflation from both Democrats and Republicans at a Senate Banking hearing. He appeared alongside Treasury Secretary Janet L. Yellen to testify about the implementation of the 2020 pandemic relief package.
“Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy,” Powell said. “But it’s also the case that price increases have spread much more broadly in the recent few months across the economy. I think the risk of higher inflation has increased.”
The consumer price index rose 6.2 percent in October compared with a year earlier, the Bureau of Labor Statistics reported, the biggest annual increase since 1990.
The Fed aims to maintain long-term inflation at 2 percent, Powell said. The central bank prefers a different inflation gauge that typically runs lower than the index, but the main personal consumption expenditures price index was still up 5 percent over the past 12 months in October, the Bureau of Economic Analysis reported last week — also a 31-year high.
“My baseline expectation is still … that most forecasters feel that inflation will move back down over the course of next year closer to our target, but clearly the risk of more persistent inflation has risen,” Powell said. “We will use our tools to make sure that higher inflation does not become entrenched.”
Powell said the Fed underestimated the challenges facing supply chains in its earlier predictions that inflation would subside by the end of this year.
Getting inflation under control is key to President Joe Biden’s economic agenda.
But Powell’s comments may aid moderate Democrats such as Sen. Joe Manchin III of West Virginia, who has cited inflation to criticize Biden’s climate, social and economic policy package. Objections from Manchin and other moderates, including Sen. Kyrsten Sinema, D-Ariz., have already cut the package’s price tag from $3.5 trillion to about $2 trillion.
In response to questions raised by Pennsylvania Sen. Patrick J. Toomey, the ranking Republican on the Banking Committee, Powell said it may be time to stop using the word “transitory” when it comes to describing the rising prices.
“I know you believe this is transitory. Everything is transitory. Life is transitory,” Toomey said. “How long does inflation have to run above your target before the Fed decides maybe it’s not so transitory?”
Powell said that to many people “transitory” means “short-lived,” but the Fed uses the term differently.
“The word transitory has different meanings to different people,” Powell said. “We tend to have used it to mean that it won’t leave a permanent mark in the form of higher inflation. It’s probably a good time to retire that word and try to explain more clearly what we mean.”
Senate Banking Chairman Sherrod Brown blamed inflation on supply chains but said corporations also have a choice when it comes to raising prices.
“Executives could get a slightly smaller pay bump this year, and stock buyback plans could be put on hold, instead of raising costs for customers. There’s no inexorable law that says profits for those at the top must continue to rise in perpetuity, even at the expense of everyone and everything else in the economy,” the Ohio Democrat said. “Corporations can get away with it because they have too much power in the economy.”
Toomey countered that Democratic policies drove up costs, including the Biden administration’s limit of domestic oil and gas supply and the financial assistance included in the pandemic relief package Democrats passed in March through reconciliation.
The $2 trillion climate, social and economic reconciliation package the House passed this month would further stoke inflation, Toomey said.
Yellen, in response to questions from Brown, said the bill would bring down costs for families by subsidizing some of the most burdensome expenses they face, including child care, elder care, education and prescription drugs.
“These are some of the most burdensome items in family budgets, ones that have risen more rapidly than the general level of prices over time. The bill will help families meet those burdensome expenditures,” she said.
Yellen also urged senators to raise the debt ceiling “expeditiously.” It is uncertain whether the Treasury will be able to finance government obligations beyond Dec. 15, given spending mandated by the bipartisan infrastructure law passed this month, she said.
“I have a high degree of confidence that Treasury will be able to finance the U.S. government through Dec. 15, but there would be scenarios in which Treasury would not have sufficient funds to continue to finance the operations of the U.S. government beyond that day,” she said.
Omicron variant risks
Powell also warned of the threat posed by the emerging omicron variant of the coronavirus. The delta variant slowed economic growth and delayed the return to work for many over the summer. The omicron variant has the potential to do the same, Powell said.
“The recent rise in COVID-19 cases and the emergence of the omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” he said.
Yellen said vaccines remain the best defense against emerging variants.
“The progress of our economic recovery can’t be separated from our progress against the pandemic,” she said. “People should get vaccinated and boosted.”
Both Brown and Toomey pressed Yellen on a report on stablecoin cryptocurrencies released this month by the President’s Working Group on Financial Markets, which she chairs. The digital assets peg their value to fiat currency, unlike the free-floating value of other cryptocurrencies, such as bitcoin, driven by supply and demand.
Regulators said in the report that absent enough regulatory oversight, the stablecoins could pose a threat to financial stability.
“There are significant risks associated with these currencies — risks to the payment system, risks of runs, and risks related to the concentration of economic power,” Yellen said. “We’ve called upon Congress to put in place for the stablecoins a regulatory framework that will make them safe, protect consumers and put them on a level playing field with other providers of similar services, such as banks.”
Powell said he agreed with Yellen’s assessment.
Brown compared the emerging digital assets to over-the-counter derivatives and subprime mortgage bundling that contributed to the 2008 financial crisis. Financial industry groups are using the same arguments today to push against regulation of stablecoins as they did for those instruments leading up to the last crisis, he said.
“Today, all of us on this committee of both parties should be concerned about that, should understand historical parallels, and should listen to this very bipartisan panel — the secretary of the Treasury and the chair of the Federal Reserve,” Brown said.
Toomey criticized the report’s assertion that only regulated depository institutions should issue stablecoins.
“The mechanism by which the value of the stablecoin is maintained relative to a fiat currency may vary significantly,” he said. “Some arguably look somewhat like depository institutions. Others look much more like money market accounts. Still others look like something wholly new. Why suggest that they all must be regulated the same way and treated as a depository institution?”