Federal Reserve Chairman Jerome Powell said on Thursday that he expects inflationary pressures in the near future, but that this is unlikely to be enough to encourage the central bank to raise interest rates.
“We expect that if the economy reopens and hopefully increases, we will see inflation increase through base effects,” Powell told a Wall Street Journal conference. “It could push prices up.”
Markets reacted negatively to Powell’s comments, with equities declining and Treasury yields jumping. Some investors and economists have been looking for him to address the recent rise in rates, with the possible nod to adjusting the Fed’s asset buying program.
The Fed is currently buying $ 120 billion a month in Treasury and mortgage bonds. Recent market talks have revolved around the central bank possibly implementing a new version of ‘Operation Twist’, in which it sells short-term notes and buys long-term bonds.
According to Fed officials, the central bank is far from any action to try to influence long-term returns, despite expectations from economists and Wall Street strategists, reports Steve Liesman of OilGasJobz.
Powell rather reiterates statements he has made about inflation, saying he does not expect the rise in prices to be prolonged or enough to change the Fed from its accommodative monetary policy. He did note that the increase in yields did attract his attention, as well as the improvement in economic conditions.
“There is good reason to think that the outlook on the margin is becoming more positive,” he said.
The Fed likes inflation to be around 2%, a rate that he says is a healthy economy and that it offers room to cut interest rates during times of crisis. However, the rate has risen lower than that for most of the past decade, and inflation was particularly weak during the coronavirus pandemic.
With the economy on the rise again, Powell is likely to emerge, Powell said, but he added that it is likely to be short-lived and appear higher due to ‘base effects’, or the difference from the deep depressed levels from last year, just as the The Covid-19 crisis began.
Raising interest rates, he added, would require the economy to return to full employment and inflation to a sustainable level of more than 2%. He also does not expect this to happen this year.
“There’s just a lot of ground to cover before we get to that,” he said. Even though the economy is seeing ‘short-term increases in inflation … I expect us to be patient’.
The Fed has repeatedly said it will keep short-term rates near zero, and will continue its monthly bond buying program until it not only sees a low unemployment rate, but also a job recovery that is “inclusive” across incomes, gender and races. .
However, some economists are worried that the Fed’s commitment to low rates will boost inflation. Powell said he was “very aware of the lessons of runaway inflation in the 1960s and ’70s, but believes this situation is different.
“We are very vigilant and I think it is a constructive thing for people to indicate potential risks. I always want to hear it,” he said. ‘But I think it’s more likely that what’s going to happen in the next year or so will mean that prices will rise but will not stay and certainly will not stay to the point where it will raise inflation expectations significantly above 2% not.’