Such an outlook, Powell emphasized, is just the most likely scenario, adding that if inflation, which is already higher and lingers for longer than expected, moves persistently higher, the Fed would act.
“Our monetary policy is well positioned to manage a variety of plausible outcomes,” he remarked.
The Fed is about to begin withdrawing some of its support for the economy in times of crisis by reducing monthly purchases of Treasuries and mortgage-backed assets by $ 120 billion, a move it has signaled it could take. next month.
However, the central bank faces a delicate balancing act in its dual mandate of seeking full employment and price stability.
Consumer prices have risen to more than double the Fed’s 2% target, but employment is still well below its pre-pandemic level.
And, Powell noted, “supply constraints and high inflation are likely to last longer than expected and well into next year, and so is the pressure on wages.”
The most likely scenario is that inflationary pressures will ease and job growth will pick up its pace from last summer, he said, but “if we saw a risk of inflation moving persistently higher, we would certainly use our tools.”
For now, he said, the Fed will watch and wait.
“Although the time is approaching to reduce our asset purchases, it would be premature to tighten policies using rates now, with the effect and intention of slowing employment growth, when there are good reasons to expect us to return to strong employment growth. and to reduce supply restrictions, which would have the effect of increasing the economy’s potential production. “