US Federal Reserve (Fed, central bank) Chairman Jerome Powell downplayed market concerns about rising inflation, reiterating on Tuesday that interest rates will remain low until the labor market and prices recover. go up consistently.
The coronavirus pandemic remains the determining factor in a recovery in the world’s largest economy, but Powell said the vaccines provide hope that things can return to some normalcy. Meanwhile, the Fed has tools to control price increases, he noted.
Amid the discussion of a new US $ 1.9 trillion economic aid mega-package, Powell also downplayed the urgency of reducing the current $ 3 trillion fiscal deficit.
Against a backdrop of growing fears in markets that a rapid post-pandemic recovery, fueled by more official stimulus, will lead to higher interest rates to contain inflation and reduce companies’ chances of financing themselves, Powell sought to give investors peace of mind during the first day of their semiannual hearing before Congress.
Inflation will rise and be “volatile” this year when Americans start spending more, he explained.
However, he told the Senate Banking committee that these price increases are unlikely to be widespread or persistent.
“After sharp drops in the spring (boreal 2020), consumer prices rose partially the rest of the year” but “remain weak” in several sectors particularly affected by the pandemic, Powell said.
“At 12 months, inflation remains below our 2% target,” he observed.
IMF Chief Economist Gita Gopinath recently said that IMF forecasts point to 2.25% inflation in 2020 in the United States.
“We had less than 2% inflation for the last 25 years,” Powell recalled, noting that changes in the consumer price index don’t happen overnight.
The Federal Reserve will keep its rates low as long as inflation does not lastly exceed 2% and the economy does not approach full employment, he said.
There is a “long way” before seeing significant progress in the job market, he said, adding that coronavirus vaccines should “accelerate” the economic reactivation and offer “a glimmer of hope to return to more normal conditions this year.”
In the midst of the pandemic, the Fed lowered its benchmark interest rates to minimum levels of 0 to 0.25% in March, which it has no intention of increasing in the short term.
It will also maintain its asset purchases “at least at the current level” until “substantial progress” is seen towards the goals set by the agency, Powell said.
Powell indicated that the real level of unemployment is close to 10% and not the official rate of 6.3% that marked January.
– “We have the tools” –
Powell insisted that the Fed is prepared for different scenarios. Therefore, “should persistent unwanted inflationary pressures occur … we have the tools to address them.”
In more than a decade after the 2008 crisis, inflation in the United States hardly exceeded the Fed’s 2% target, even when unemployment hit a record low of 3.5% in February 2020 and consumer capacity it was then strengthened.
That prompted the central bank to change its perspective. Instead of raising benchmark rates as unemployment falls to contain inflation, it will hold them until the price increase exceeds the target level for a considerable period.
The prospect of new economic stimuli that could boost activity raises fears of an overheating of the economy.
Thus the interest rate on 10-year Treasury bonds – key to foreshadowing inflation expectations – rose sharply in recent days, which hit the stock market due to concerns that the Fed would raise its rates earlier than expected although the economy has not fully recovered.
Powell sought to ward off these fears by showing that the central bank will continue to act on the economy.