Powell Calls High Inflation 'Severe Threat'

Believes economy no longer needs emergency stimulus

Federal Reserve Board (FRB) Chair Jerome Powell indicated, during his confirmation hearing with the U.S. Senate Banking Committee, that high inflation poses a "severe threat" to the U.S. economic recovery. To combat inflation, he said that the Fed is prepared to raise interest rates, particularly since he believes that the economy no longer needs emergency support.

Powell indicated that the Fed may start reducing its $8.8 trillion portfolio of bonds and other assets later in 2022, in order to tighten financial conditions. Compared with a prior exercise in shrinking the Fed's bond portfolio in the last decade, Powell said that the process now could proceed "sooner and faster, that much is clear ... We're going to have to be both humble and a bit nimble."

Key Takeaways

  • In his confirmation hearing before the U.S. Senate Banking Committee, Fed Chair Jerome Powell indicated that high inflation is becoming a "severe threat."
  • He said that the Fed is prepared to raise interest rates to combat inflation.
  • He also noted that the Fed is prepared to start reducing its balance sheet.

'Time for a More Normal Level'

Reflecting on the Fed's extraordinary measures taken in 2020 to prop up the U.S. economy as the COVID-19 pandemic unfolded, particularly its aggressive purchases of bonds that sent interest rates down to near zero, Powell told the Senate Banking Committee: "It is really time for us to begin to move away from those emergency pandemic settings to a more normal level. It's a long road to normal from where we are."

Optimistic About Supply Chain Bottlenecks

Powell expressed optimism that the widespread global supply chain bottlenecks that have contributed to rising inflation will ease later in 2022. However, he also acknowledged that lockdowns in China and other countries could worsen supply-chain problems, adding to inflationary risks.

Regarding the omicron variant of COVID-19, Powell did not see it as likely to cause a lasting slowdown in economic growth. "What we're seeing is an economy that functions right through these waves of COVID," he said.

Labor Force Issues

Powell indicated that the decline in the number of Americans seeking jobs despite a high number of job openings is a development that has surprised officials at the Fed. While opining that this is not a reason in itself for the current issue with elevated inflation, he noted that a smaller labor force "can be an issue going forward for inflation, probably more so than these supply chain issues."

Getting those Americans who are not actively seeking jobs back into the workforce "is going to take a long expansion," Powell said. He added: "To get a long expansion, we are going to need price stability. And so, in a way, high inflation is a severe threat to the achievement of maximum employment."

Meanwhile, buoyant markets in stocks, housing, and other assets have boosted the wealth of many Americans. This, in turn, has had the twin effects of fueling demand for goods and services while also restricting supply, as many Americans have chosen to retire early partly as a result of this increased wealth.

Article Sources
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  1. The New York Times. "Jerome Powell Says Fed Is Prepared to Raise Rates to Tame Inflation." Accessed Jan. 12, 2022.

  2. The Wall Street Journal. "Fed’s Powell Says Economy No Longer Needs Aggressive Stimulus." Accessed Jan. 12, 2022.

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