Fed Chairman Powell says the economic reopening could cause inflation to pick up temporarily

Federal Reserve chairman Jerome Powell said Thursday that he expects some inflationary pressures in the coming period, but that it is unlikely to be enough to stimulate the central bank to hike rates.

“We expect inflation to rise once the economy reopens and hopefully base effects pick up,” Powell said at a conference in the Wall Street Journal. “That could put upward pressure on prices.”

The Fed expects inflation to be around 2%. In their view, this rate signals a healthy economy and offers room for interest rate cuts in times of crisis. However, the rate has fallen below that for most of the past decade, and inflation has been particularly weak during the pandemic.

With the economy increasingly back on its feet, some price pressures are likely to come, Powell said, but he said they are likely to be temporary and look just as high from last year’s severely depressed levels due to “base effects” or the differential measures The Covid-19 crisis began.

An increase in interest rates would require the economy to return to full employment and inflation in order to reach sustainable levels above 2%.

He doesn’t expect it this year either, although he said the recent surge in government bond yields caught his attention.

“There’s just a lot to do before we get there,” he said. Even if the economy “sees temporary increases in inflation … I assume we will be patient”.

The Fed has repeatedly stated that it will anchor short-term rates near zero and continue the monthly bond purchase program until it sees not only low unemployment but also a rebound in jobs that are “inclusive” across income, gender and race lines. is.

However, some economists have feared that the Fed’s commitment to low interest rates will fuel inflation. Powell said he was “very attentive” to the lessons of the runaway inflation of the 1960s and 1970s, but believes the situation is different.

“We’re very attentive and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I think it’s more likely that what happens in the next year or so will lead to price increases, but not rise, and certainly not to the point where they would move inflation expectations well above 2%. “

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