WASHINGTON – If you find the current economy a little confusing, don’t worry: the same goes for the country’s top economic official, Federal Reserve Chairman Jerome Powell.
In a long-awaited press conference on Wednesday, Powell said the Fed was sticking to its fundamental economic forecast: COVID-19 will eventually subside, which, in turn, will allow bottlenecks to expand. the supply chain to stand up. More people will return to the workforce, the economy will strengthen and inflationary pressures will ease.
And yet, the country’s leading economic figure has admitted that it is not at all clear when or even if things will turn out the way he and other Fed officials are hoping. And so far they haven’t. The Fed likely won’t have a clear view of inflation and the job market, Powell suggested, until COVID-19 and its economic consequences – reduced travel, decreased spending, reduced supply and labor shortages – easing further.
“We hope to gain much greater clarity on the direction of this economy and on the characteristics of the post-pandemic economy in the first half of next year,” he said.
This is a view Powell maintained even as inflation hit a three-decade high, placing a burden on households paying more for food, rent, fuel oil and other basic necessities. . In his remarks Wednesday after the Fed wrapped up its last policy meeting, Powell acknowledged the hardships that rising prices have placed on many families.
“People who live paycheck to paycheck or see higher grocery costs, higher gas costs… we fully understand what they’re going through,” he said.
In the meantime, the Fed said, it will start trying to counter those inflationary pressures by reducing its $ 120 billion monthly bond purchases to $ 15 billion per month, starting this month. These purchases, launched last summer, were aimed at maintaining long-term interest rates in order to stimulate borrowing and spending. With the economy recovering, they are not needed, suggested Powell.
The Fed could change the pace of its reduction, she said in a statement. This could, for example, speed up reductions if inflation worsened. But if he sticks to that pace, bond purchases would end by June. This would allow the Fed to possibly raise its short-term benchmark rate, which affects a wide range of consumer and business loans and is now set at zero, as of this month.
Some economists and investors expect the Fed to do just that. The rate hike in June would be much earlier than expected this summer, when Fed policymakers predicted they wouldn’t until the end of 2023.
In his press conference, however, Powell downplayed the likelihood of a rate hike anytime soon. He said unemployment was still too high, with 5 million people working less than before the pandemic. This observation suggests that Powell will want to keep rates low until unemployment falls as close as possible to its pre-pandemic level of 3.5%.
Yet in another sign of the many uncertainties in the economy, he also acknowledged that hiring hasn’t been as strong in recent times as he had hoped. With schools resuming last month and a $ 300-a-week federal unemployment benefit expiring, Powell and most economists expected many more people to start taking jobs in September. Instead, the hiring that month fizzled out.
“I think there is room for a lot of humility here,” said the Fed chairman. “We are learning now, we have to be humble about what we know about this economy. “
“It’s hard enough to forecast the economy in normal times,” he continued. “When you talk about hot global supply chains, it’s a whole different thing. And you talk about a pandemic that is excluding people from the workforce for reasons that we … don’t have much experience with. So it’s very, very difficult to predict and not easy to define a policy.
Powell said the Fed would not hesitate to assess rates if inflation accelerates or if consumers and businesses start to expect higher prices, which can become a self-fulfilling trend. If companies, for example, expect higher costs, they will raise their own prices in response.
“For now, (the risk) appears to be biased towards higher inflation,” he said. “We must be able to act in the event that it becomes necessary or appropriate to do so.”
Yet Eric Winograd, an economist at asset manager Alliance Bernstein, said Powell’s comments seemed to suggest he viewed problematic inflation as “a hypothetical event rather than a realized event.”
“The Fed clearly does not believe that inflation is likely to stay at current or near levels, or that the labor market is back to full employment,” Winograd added. “Until they are convinced either that inflation is too high for a long time, that inflation expectations are no longer anchored or that the economy is at full employment, they do not intend to raise rates. interest.”
Powell said the high prices could last until the end of next summer. But he stuck with the Fed’s view that they will likely decline after that. He also said the big pay increases that many Americans have received in recent months are not fueling inflation any further. Wages and salaries soared during the July-September period from the previous year, the most in at least 20 years.
The central bank is shifting from a protracted effort to stimulate the economy and encourage hiring to an effort that also focuses on fighting inflation. The Fed now faces the delicate task of ending its ultra-low rate policies, which it hopes will slow inflation, without doing so quickly to weaken the labor market or even trigger another recession.
The economy recovered from the pandemic recession, although growth and hiring stumbled in the July-September quarter, in part because an increase in delta cases discouraged many from traveling, doing shopping and eating out. Many economists say they are hoping that with the increase in vaccinations and the demise of the delta wave, job growth rebounded in October from the weak pace in September. The October jobs report will be released on Friday.
The Fed meeting took place as Powell’s future as Fed chairman remains uncertain. President Joe Biden has yet to announce whether he will reappoint Powell for another four-year term. Powell’s current term expires in early February, but previous presidents have typically announced such decisions in late summer or early fall.