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Fed Chair Powell Changes Tune On Inflation—Says Higher Prices Could Remain For Months

Topline

One day after a red-hot inflation reading, Federal Reserve Chair Jerome Powell is slated to tell Congress Wednesday that consumer prices have “increased notably” and are likely to “remain elevated” in coming months, marking a noticeable change in tune from his longtime insistence that recent inflation will only be transitory. 

Key Facts

In prepared remarks, Powell says prices are appearing to rise quickly partly because they are recovering from the sharp pandemic-related price declines of last spring, as well as due to recent production bottlenecks and other supply constraints.

He also notes prices for services hard hit by the pandemic have also jumped in recent months as demand surges while the economy reopens.

Despite warning of prolonged price spikes, Powell said the labor market still has a “long way to go” before meeting the Fed’s goal of full employment and pledged to “deliver powerful support to the economy until the recovery is complete.”

Though Powell says price increases should moderate, his remarks—notably—don’t refer to inflation as “transitory” a single time, Vital Knowledge Media Founder Adam Crisafulli wrote in a Wednesday email, pointing out the Fed chair’s comments aren’t as forcefully reassuring as they’ve been in recent weeks.

Perhaps prompting Powell’s changing sentiment, consumer prices in June spiked a greater-than-expected 5.4%, hitting their highest yearly growth rate in nearly 13 years—for the second time this summer.

What To Watch For

Questions from lawmakers on the House’s financial services committee. The session begins at 12 p.m. EDT.

Key Background

As markets crashed at the height of pandemic uncertainty in March 2020, Powell pledged to use the Fed’s “full range of tools to support the U.S. economy” until “substantial further progress” is made toward a full economic recovery. Since then, the S&P 500 has skyrocketed nearly 90% from a mid-pandemic low to its latest high Monday, alongside the Dow Jones Industrial Average and tech-heavy Nasdaq, which have posted similarly stunning gains. The labor market, on the other hand, has remained stubbornly below pre-pandemic levels, with unemployment still at about 5.9%. 

What We Don’t Know

The Fed has given virtually no indication as to when it will taper its pandemic-era policy, which includes keeping interest rates at historically low levels and buying $120 billion in bonds each month to help bolster the economy. “As we have said, we will provide advance notice before announcing any decision to make changes to our purchases,” Powell is slated to say Wednesday. Crisafulli believes the Fed may announce such a change in late August, when officials are slated to meet for an annual retreat in Jackson Hole, Wyoming.

Further Reading

Further Detail On Transitory Inflation Revealed From Fed Meeting (Forbes)

July 2021 Fed Meeting Minutes: Tapering Will Come…Eventually (Forbes)

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