The Fed: Sustained Inflation of 2% and Full Employment

by Michael London | 07/29/2021 11:20 AM
The Fed: Sustained Inflation of 2% and Full Employment

So long as inflation returns to target, the Fed is unconcerned. Powell said that there is “absolutely no sense of panic” if the inflation rate rises above 2%.

 

Jerome Powell, chairman of the Federal Reserve, told the Washington Examiner that inflation may be 'greater and more sustained' than expected. Powell warned that inflation may be more aggressive and persist longer than expected.

Powell, fresh off a two-day meeting with senior Fed officials, told reporters that although inflation may be higher than previously anticipated, the Fed is still not ready to discuss increasing interest rates to combat rising prices.

Because of delays, recruiting issues, and other limitations, Powell warned Wednesday that inflation may be higher and more persistent than expected.

He went on to say that indicators of long-term inflation expectations are generally consistent with our 2% target.

"We would change policy if we observed indications that the path of inflation or longer-term inflation expectations were going significantly and consistently above our goal."

The Federal Reserve's dual mission includes two objectives.

And it wants prices to be steady.

The economy has shown indications of overcoming its COVID-19 malaise and is advancing toward the Fed's goals.

But the Fed wants to see "significant improvement," Powell said Wednesday afternoon. 

The government's June employment data revealed a better-than-expected 850,000 new jobs, although the unemployment rate rose from 5.8% to 5.9%.

Powell is optimistic.

"We have a very robust labor market," he said.

"We're definitely on track for a very robust labor market, with high participation, low unemployment, high employment, and salaries rising throughout the spectrum," he said.

Even though prices rose 5.4% year-on-year last month, the chairman remained upbeat about inflation.

Powell expects inflation to fall after pandemic-induced supply constraints are resolved.

For example, he attributed the latest inflation report's overshoot to new and used vehicles, airline tickets, and hotel rates.

The Consumer Price Index rose 5.4% in the year ended June, the highest pace since 2008.

The result exceeded expectations by 4.9%.

The Fed says it doesn't mind if inflation exceeds 2% as long as it returns to its target.

The Fed's decision to hold its key interest rate — the federal funds rate — close to zero will maintain the low-rate environment that has helped hold down mortgage rates. Projections released in June indicated policymakers were not likely to raise the federal funds rate before 2023.

The central bank also stands by its commitment to buying at least $80 billion in Treasury bonds and $40 billion in mortgage-backed securities per month, a strategy that has led more directly to today's cheap mortgage rates.

Bond buying is keeping Treasury yields, or interest rates, in check. As those yields rise or fall, rates on fixed-rate home loans tend to do likewise.

With investors worried about economic risks from the Delta variant, the 10-year Treasury yield has dropped to its lowest levels since February — and mortgage rates have done the same.

"These asset purchases contribute to the maintenance of stable market conditions and accommodating financial conditions, thus facilitating the flow of credit to consumers and companies," the Fed notes.

Policymakers suggest that they will discuss how and when to taper such purchases "at forthcoming sessions."

The bond purchases are aimed at controlling Treasury yields, or interest rates.

Rates on fixed-rate home loans often move in lockstep with those returns.

Investors fearful of the economic dangers associated with the Delta version have pushed the 10-year Treasury yield to its lowest level since February — and mortgage rates have followed suit.

Powell said that current inflation is "well above" 2% and that there is "absolutely no sense of panic."

The chairman said the central bank views the current price increase as driven by supply, which is struggling to meet the surge in demand caused by the COVID-19 epidemic.

Following the meeting, the FOMC hinted at reducing its purchases of government bonds, reversing the emergency easy-money measures adopted last year as the epidemic spread.

 

             Powell: There will be inflation, but the process of inflation will stop

 

 

 

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