Jay Powell, the chair of the Federal Reserve, warned that high inflation poses a “severe threat” to a recovery in the US jobs market as he declared the era of pandemic stimulus was over.
In testimony during his Senate confirmation hearing on Tuesday, Powell, who was nominated by President Joe Biden in November to serve a second term leading the Fed, said the economy no longer “needs or wants” the “highly accommodative” policies that have been in place since the onset of the pandemic.
Powell also warned that entrenched inflation could jeopardise what had been a historically strong expansion. “To get the very strong labour market we want with high participation, it is going to take a long expansion. [And] to get a long expansion, we are going to need price stability,” Powell said.
“High inflation is a severe threat to achieving maximum employment and to achieve the long expansion that could give us that.”
Powell acknowledged the “toll” caused by high inflation, and affirmed the Fed’s intention to use its tools to ensure it did not become a more pernicious problem.
He told US lawmakers the Fed would raise rates more aggressively if necessary and laid out the central bank’s plans to begin the “long road” to more normal monetary policy this year.
Powell’s testimony comes ahead of the latest inflation report, which on Wednesday is expected to show the consumer price index rising at an annual clip of 7 per cent, the fastest pace in four decades.
When Biden announced Powell’s renomination in November, the president made clear that containing inflation was a top priority of his administration. He added that he saw Powell as best placed to steer the US economy towards a more robust recovery.
“I believe Jay is the right person to see us through and finish that effort while also addressing the threat of inflation,” Biden said at the time.
In the weeks that followed the nomination, the Fed embarked on an abrupt policy pivot, jettisoning its characterisation of inflation as “transitory” and embracing a more aggressive approach to tame prices.
Not only did the Fed accelerate the speed at which it winds down its stimulus programme, but it prepared financial markets for the prospect of three interest rate increases this year and a move to shrink the size of its huge balance sheet at some point this year.
“I would expect this year, 2022, will be a year where we take steps towards normalisation,” Powell said, adding that the “run-off” process — in which the Fed ceases to reinvest the proceeds of its maturing securities — would happen “sooner and faster” than the last time it did so, beginning in 2017.
Economists expect the Fed to commence “lift-off” in March and begin reducing its portfolio of securities soon afterwards, a sequence many senior officials have since publicly backed.
New jobs data published on Friday, which showed the unemployment rate plummeted below 4 per cent despite a sharp slowdown in the pace of monthly jobs gains for December, further emboldened bets of a March rate rise.
Wage growth has also climbed sharply as a record number of Americans quit their jobs. Economists said the economy was close to, if not already at, maximum employment, the Fed’s second goal to gauge when to move its main policy rate away from zero.
The first goal, for inflation to average 2 per cent over time, has been “more than met”, Fed officials have said.
When asked by Democratic Senator Elizabeth Warren about big corporations raising prices, Powell said it could reflect the fact that demand was “incredibly strong”.
“They are raising prices because they can,” he added.
In choosing Powell, a Republican who was first appointed in 2017 by former president Donald Trump, Biden rejected criticism from the progressive wing of his party about the chair’s relatively loose regulatory record.
A trading scandal that erupted last year — which intensified following new disclosures by Richard Clarida, the Fed vice-chair who on Monday announced his resignation — has drawn criticism from progressives, too.
Warren pressed Powell again on Tuesday to provide “all available information” about personal financial transactions made by its officials by January 17, a request she issued on Monday.
The Fed in October announced rules that significantly curtailed the transactions of senior staff, but the latest trades, which occurred around highly sensitive policy decisions in the early days of the pandemic, tarnished the central bank’s credibility.
Powell on Tuesday said the new guidelines, which will be implemented “imminently”, amounted to a “complete change” in the way officials’ trading activity is governed.
“There will be no ability to time the market,” he said.