Fed Chairman Says the Central Bank Will Keep Current Monetary Policies in Place

Powell Emphasizes That Inflation Will Be Temporary

Yesterday, Federal Reserve Chairman Jerome Powell gave his semiannual testimony before Congress. Powell said that the central bank will wait to change its easy monetary policies, despite high inflation.

Earlier this week, the US June Consumer Price Index increased more quickly than economists expected, surging 0.9% on a monthly basis. The rate of inflation for 12 months ending in June increased from 5% to 5.4%, which was the most rapid increase in prices seen since 2008. Powell emphasized that the recent spike in inflation will be temporary.

Factors Contributing to Inflation

Powell cited several factors contributing to inflation which he and his team believe will not be long-term trends. As industries recover from the pandemic, many companies are still struggling with supply-chain bottlenecks and production issues. Meanwhile, demand for goods and services is skyrocketing as the economy reopens and consumers are eager to spend money after the pandemic. This means that prices are rising, but this will not be the case indefinitely.

The chairman said that the Fed will be ready to shift its policies, “if we [see] signs that the path of inflation or longer-term inflation expectations [are] moving materially and persistently beyond levels consistent with our goal.” He also said that the bank wants to see more improvement in the labor market before it alters its policies.

Differing Opinions About Inflation

Powell was optimistic about the economy as a whole, saying, “household balance sheets are, on average, quite strong, business leverage has been declining from high levels, and the institutions at the core of the financial system remain resilient.” Many support the Fed’s decision to stick to its easy monetary policies. However, others are concerned that the bank is being too slow to react to inflation and the economy could overheat.

Powell’s comments had little effect on US markets overall yesterday. It will be interesting to see how the Fed’s policies impact investors’ decisions in the upcoming weeks.

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