Powell: “Tension” between jobs, inflation is the Fed’s main challenge

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Federal Reserve Chairman Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, USA , September 28, 2021. Kevin Dietsch / Pool via REUTERS

Sept. 29 (Reuters) – Resolving the “tension” between high inflation and persistently high unemployment is the most pressing problem the Federal Reserve currently faces, Fed Chairman Jerome Powell said on Wednesday, acknowledging that the two central bank objectives were potentially in conflict.

“This is not the situation we have been facing for a very long time and it is a situation where there is a tension between our two goals … Inflation is high and well above target and yet there appears to be slack in the labor market, “Powell said at a European Central Bank forum, an apparent reference to the 1970s US episode of” stagflation “which combined high unemployment and unemployment. rapidly rising prices.

The United States is more than 5 million jobs short of what it was before the pandemic. At the last Fed meeting, policymakers raised their inflation expectations for this year to 4.2%, more than double the target level of 2%. They see this pace decrease in 2022 to 2.2%, slightly above what they had set in their previous projections in June.

Powell said the Fed’s working “assumption” is that inflation will subside largely on its own as the global economy returns to normal after a difficult reopening of the pandemic, a baseline that allows the Fed chief to refer to interest rate increases as always “away.”

But when asked about his biggest concerns right now, Powell raised the possible conflict between the Fed’s two goals of stable prices and full employment, a situation that could force the Fed to compromise between the two by raising rates. interest in taming prices at a time when it still wants to promote job growth.

“Managing this over the next two years is the highest and most important priority and it’s going to be very difficult,” Powell said at a virtual event alongside leaders of the ECB, Bank of Japan and from the Bank of England.

MANAGE COMPROMISES

His comments are among the most direct the Fed chief has made on a subject that policymakers have tried to play down: that the current high inflation, if it persists, could force them to start tightening monetary policy before keep their promise to achieve “maximum employment” and completely heal the labor market from its pandemic scars.

Typically, unemployment and inflation rates are inversely related, in part due to monetary policy and the use of interest rates to stimulate or reduce demand for goods and services, thereby influencing prices. and hiring.

This relationship has appeared to weaken in recent years, with low inflation coexisting in the United States with very tight labor markets and low unemployment.

But the global supply shocks caused by the pandemic have at least temporarily restored the old dynamic, pushing the availability of goods and services out of step with demand.

The question now is how long will this dislocation last, and if inflation proves to be so persistent that it overtakes the improvement in the labor market and forces the Fed to start raising interest rates as the unemployment is still high.

Inflation risks have already prompted half of Fed officials to forecast interest rate hikes from next year, and although the job market may make notable progress by then Powell said in his remarks that the challenges of reopening the world economically had become “frustrating.”

“It’s frustrating to recognize that getting people vaccinated and bringing Delta under control 18 months later remains the most important economic policy we have,” Powell said in response to a question about the US economic outlook. “And it’s also frustrating to see the bottlenecks and supply chain issues not improving, in fact at the margin seemingly getting a bit worse.”

“We see this probably continuing into the next year and sustaining inflation longer than we expected,” Powell said. “But ultimately, the outlook for next year among my colleagues and I at the Fed for next year is a pretty strong year with growth well above trend and unemployment reaching levels significantly lower than today. ‘hui. “

Fed officials at their meeting earlier this month downgraded their views on U.S. gross domestic product growth for this year, but improved estimates for next year, reflecting expectations that the Activity for the remainder of this year will be hampered by supply issues and these restrictions will end in 2022..

Reporting by Dan Burns and Howard Schneider; Editing by Andrea Ricci

Our standards: Thomson Reuters Trust Principles.


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