Federal Reserve Chairman Jerome Powell said inflation has risen significantly and is likely to remain high for the next several months before moderating.

Inflation “has been higher than expected and a little more persistent than we had expected and hoped for,” Powell said in testimony Wednesday before the House financial services committee.

Pandemic bottlenecks and other supply constraints have created “just the perfect storm of high demand and low supply” which has led to rapid increases in the prices of some goods and services, he said. -he declares. Mr Powell said he expects these effects “to partially reverse as the effects of the bottlenecks dissipate”.

The Fed is not expected to raise interest rates because of a one-time price hike, Powell said. “You wouldn’t react to something that is likely to go away,” he said.

While the Fed and many private sector forecasters expected inflation to rise this year as an increase in consumer spending collided with pandemic shortages and bottlenecks, the strength of the last three digits of monthly inflation was greater than expected. As inflation is expected to fall, questions abound as to when and by how much inflation will drop from the Fed’s 2% target.

“The incoming inflation data has been higher than expected and hoped for, but it’s actually still consistent with what we’ve been talking about,” Mr Powell said, with inflation coming from a “small group of goods and services that are directly linked to the reopening of the economy.

Mr. Powell added, “We are monitoring the situation very closely. We are committed to price stability, and if we find that inflation remains … materially high or above our target for some time, and threatens to uproot inflation expectations and create risk of a longer period of inflation, we would absolutely change our policy if necessary.

The US inflation rate recently hit a 13-year high, sparking a debate over whether the country is entering a period of inflation similar to the 1970s. Jon Hilsenrath of the WSJ examines what consumers can expect. ‘then wait.

Consumer prices in the United States continued to accelerate in June at the fastest rate in 13 years as the recovery from the pandemic accelerated. The Labor Department said on Tuesday that its consumer price index rose 5.4% in June from a year earlier. Excluding the volatile food and energy categories, prices rose 4.5% from a year earlier, the highest in 30 years.

A separate inflation measure released Wednesday morning, called the Producer Price Index, which tracks the prices businesses receive for their goods and services, rose 7.3% in June from a year earlier, from a 6.6% increase in May. Excluding food and energy, the index climbed 5.6% in June from a year ago.

Since the coronavirus pandemic hit the U.S. economy in March 2020, the Fed has set interest rates close to zero. He said he plans to keep rates there until he’s convinced inflation will stay at its 2% target and the labor market has recovered, or returned to that. which he calls “maximum employment”.

The central bank also buys $ 120 billion per month in treasury bills and mortgage securities to maintain long-term rates, and it is committed to continuing these purchases until it makes “substantial progress.” towards its inflation and employment targets.

Mr Powell said the economy “is still a long way off” from meeting that standard, but officials expect progress to continue. “This is sort of a discretionary test,” Powell told lawmakers.

Several Fed bank chairmen have indicated that they are eager to start cutting, or “down”, the pace of these purchases. Other senior Fed officials have suggested the central bank should not be in a hurry.

“We will have another round of talks on this same topic” at the Fed meeting in two weeks, he said. Mr. Powell did not suggest that decisions were imminent.

Investors and Fed officials are grappling not only with an unexpected explosion of price pressures, but also with the implementation of a new policy framework, unveiled in August 2020, designed to look for periods of inflation. slightly above 2% after periods below this level. Officials have been vague on what exactly would be an acceptable period or extent of inflation above target.

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The recent surge has created an unexpected problem for the Fed as inflation has far exceeded this target. “Inflation is not moderately above 2%. It is well above 2%. It doesn’t sound like “moderately,” said Powell. The question the Fed faces is “where does that leave us in about six months when inflation, as we expect it to, goes down?” “

At last month’s meeting, 13 of the 18 officials predicted they would hike interest rates near zero by 2023, with most expecting to hike their benchmark rate by 0.5 percentage points. percentage. Seven is expected to hike rates next year. The projections surprised many investors because in March, most officials expected to keep rates stable until 2023.

The projections, along with Mr Powell’s comments after the meeting, suggested that more officials believed inflationary pressures could prove to be more lingering than initially expected and wanted to hedge against that risk by forecasting rate hikes sooner. . The Fed often shifts its policy outlook in response to shifts in the balance of risks to growth or increased uncertainty about the most likely outcome.

Some investors believed any policy pivot risked undermining the Fed’s new framework and its tolerance for temporarily higher inflation.

“The issue we are facing with this inflation has nothing to do with our framework,” Powell said at a press conference last month. The Fed executive said officials would not raise interest rates simply because unemployment fell to low levels to anticipate expected inflationary pressures, as the central bank did during the expansion. previous. “This is not at all the current situation. We have several million people unemployed and inflation is well above our target, ”he said.

For months, Mr Powell used pre-pandemic employment levels as a guide for what might meet a working definition of “maximum employment.” But the Fed’s monetary policy report, released last Friday, suggests officials may become less confident about the possibility of returning to February 2020 labor market conditions without accepting higher inflation.

The Fed has signaled the risk that the pandemic has left “lasting effects on the structure of the labor market”, notably by accelerating the adoption of new technologies or the pace of workers retiring. “The post-pandemic labor market and peak employment characteristics may well be different from those at the start of 2020,” the report said.

Since many Fed officials are likely to have concluded that their inflation targets have been met, their analysis of what constitutes “maximum employment” could be the deciding factor in determining when to raise rates.

Mr Powell presented the Fed’s semi-annual monetary policy report to committee members on Wednesday and is expected to do so again to members of the Senate Banking Committee on Thursday.

Write to Nick Timiraos at nick.timiraos@wsj.com

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