Powell’s decision to argue that inflation is not a concern, rather than outlining what could go wrong, received praise from proponents of the one-year-old monetary policy framework he championed, which emphasizes the full objective. Fed employment and rejects the kind of pre-emptive fight against inflation by raising rates.
Of course, it occurs when the Fed authorities themselves enter fully into their internal debate about when to start moving away from the emergency measures implemented to protect the economy, still ongoing to some extent, generated by the COVID pandemic- 19.
Several of Powell’s colleagues have begun pushing for the Fed’s asset purchases to be liquidated quickly as the first stage in that process.
In fact, Powell used his speech on Friday to acknowledge that, at least as of last month’s meeting, he was in favor of the Fed starting to cut its $ 120 billion in monthly asset purchases this year, with inflation. already meeting the standard to do so, and when further progress is expected on the employment front.
But to raise interest rates, the Fed has said the economy must pass a tougher test, which includes not only full employment, but also inflation that appears poised to exceed 2% for some time.
Although some other Fed officials have said they believe inflation is already averaging that elusive target, Powell did not commit. “Time will tell if we have reached 2% on a sustainable basis.”
The reasons why inflation does not disturb you.
1. It is not broad-based
So far, inflation has come from sharply higher prices in a limited number of sectors, particularly in goods and services hardest hit by the coronavirus pandemic and for which demand is now recovering rapidly as the economy reopens.
2. the biggest hikes are already subsiding
Prices for cars and other durable goods are now stabilizing or falling after skyrocketing in the summer. “It seems unlikely that durable goods inflation will continue to contribute significantly to headline inflation over time,” Powell said.
3. No threat of wages
Wages are increasing, but not faster than productivity gains or inflation in a way that could lead to an upward spiral. “We will continue to monitor this carefully,” he said.
4. Inflation expectations are anchored
Market-based measures and surveys analyzed by the Fed indicate that inflation expectations have made a “welcome return” to levels more consistent with their inflation target, but have not risen as fast as actual inflation, “which it suggests that households, businesses and market participants also believe that current high inflation readings are likely to be transitory, “according to Powell.
5. Globally, pressures are going down
Factors such as the aging of the population in the United States and in other countries, along with globalization and advances in technology, are pushing prices down worldwide. “There is little reason to think that they have suddenly reversed or decreased,” Powell said.