January 23, 2022


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Watch Live: Jerome Powell and Janet Yellen Testify About the Economy

Watch Live: Jerome Powell and Janet Yellen Testify About the Economy

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Jerome H. Powell, the Federal Reserve chair, signaled on Tuesday that the central bank is growing more concerned about high — and stubborn — inflation, and could speed up its plan to withdraw economic support as it tries to ensure that rapid price gains do not become long-lasting.

His comments, delivered during a Senate Banking Committee hearing, came at a challenging economic moment for the Fed. Prices for food, shelter and other items are rising quickly, millions of workers have yet to return to the labor market and the virus continues to pose risks to the economic outlook, most recently with the new Omicron variant.

The Fed had been buying $120 billion in government-backed securities each month throughout much of the pandemic to bolster the economy by keeping money flowing in financial markets. In November, officials announced plans to slow those purchases by $15 billion per month, which would have the program ending midway through 2022. But Mr. Powell signaled on Tuesday that the central bank could wrap up its bond-buying more quickly, cutting down the amount of economic juice the Fed will add in upcoming months.

“At this point, the economy is very strong, and inflationary pressures are high,” Mr. Powell said during a hearing before the Senate Banking Committee. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”

Mr. Powell said he expected Fed officials to discuss slowing bond purchase faster “at our upcoming meeting,” which is scheduled for Dec. 14-15. He stressed that between now and then, policymakers will get a better sense of the new Omicron variant of the coronavirus, a fresh labor market report and updated inflation numbers.

Mr. Powell made it clear that it was too soon for Fed policymakers — or anyone — to tell how much the new variant will affect the economy, since that will hinge on how easily it transmits and whether it causes more severe disease.

“What I’m told by experts is that we’ll know quite a bit about those answers in about a month,” he said. “We’ll know something, though, within a week or 10 days.”

For now, he said, “it’s a risk, it’s a risk to the baseline — it’s not really baked into our forecasts.”

While Omicron’s danger remains uncertain, another virus surge would pose a double-barreled threat to the economy: It could prevent workers from returning to the job market just as it prevents roiled supply chains from returning to normal, keeping a full labor market recovery at bay while making inflation last longer. And the potential threat hits at a fraught moment for policymakers.

The economy has boomed back this year, and hot demand has collided with constrained supply to push inflation sharply higher. The central bank has slowly reoriented its economic policy stance as price gains remain stubbornly elevated, trying to put itself in position to react if needed. Now, the Fed appears to be pivoting more aggressively — and focusing more concertedly on controlling rapid inflation.

“Generally, the higher prices we’re seeing are related to the supply-and-demand imbalances that can be traced directly back to the pandemic and the reopening of the economy, but it’s also the case that price increases have spread much more broadly in the recent few months,” Mr. Powell said Tuesday. “I think the risk of higher inflation has increased.”

Monetary policymakers had spent recent months focused on helping the economy to heal, hoping to pull the millions of workers still missing from the job market back into work.

The Fed’s policy interest rate, its more traditional and more powerful tool, has remained set to near zero to that end. Officials had been stressing that they would be patient in pulling back that support and cooling down the economy, giving missing employees more time to return.

But their tone appears to be shifting.

Slowing bond purchases quickly would put officials in a position to raise borrowing costs sooner than previously forecast. Lifting interest rates earlier or faster would pump the economic brakes, helping to slow home-building, business expansions and consumer spending. Weakening demand would in turn help to weigh down prices over time.

By trying to rein in price increases, the Fed would probably slow hiring. Doing so could be painful at a moment when people remain out of work partly out of virus fears or a lack of child care.

That’s why Omicron could pose such a big challenge. If the new variant continues to shut down factories and slow shipping routes while keeping would-be job applicants at home, it could put the Fed in a tough spot. Central bank policymakers are supposed to foster both full employment and keep prices stable, and such a situation would force them to choose between those goals.

Mr. Powell’s willingness to to pull back support faster despite the new variant — and his full-throated recognition that price gains are not poised to be as short-lived as officials had once hoped — caught investors’ attention.

At one point, Mr. Powell even said that at “coming meetings” he expected the Fed’s policy-setting committee would say that when it comes to inflation, its standard for lifting interest rates had been met. That would mean that central bankers would simply be looking to the job market as they weighed when, whether and how much to raise borrowing costs.

“The tone of his remarks was notably hawkish, suggesting that the Fed’s primary focus is on the risk of more persistent excess inflation,” Krishna Guha, an economist at Evercore ISI, wrote in a research note reacting to the testimony.

Stocks, which had been down roughly 0.5 percent for much of the morning, tumbled after Mr. Powell’s comments, with the S&P 500 trading down about 1.9 percent shortly after noon. Short-term bond yields, which are heavily influenced by expectations for Fed rate hikes, spiked as investors began to expect what is sometimes referred to as a “hawkish” approach to interest rate policy.

“The Fed is the ultimate owner of the ‘transitory’ characterization, and the chair’s decision to move beyond that is a decidedly hawkish step,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, in a note to clients shortly after Mr. Powell’s comments.

The shift in the Fed’s policy approach comes at a sensitive moment for Mr. Powell. The Biden administration announced last week that it will renominate him as chair of the Fed, and that it will elevate Lael Brainard — now a governor — as the central bank’s vice chair. Both await Senate confirmation.

The twin threats of lasting supply chain disruptions and another pandemic flare also come as Republicans are trying to pin high inflation on the Biden administration and its policies. Several Republican senators asked combative questions of Mr. Powell and Treasury Secretary Janet L. Yellen during their joint testimony on Tuesday, at times trying to back them into blaming rapidly rising prices on Mr. Biden’s policies.

Credit…Sarahbeth Maney/The New York Times

The barrage of criticism came as Democrats are working to pass another $2.2 trillion climate change and social policy bill before the end of the year.

Ms. Yellen defended the Biden administration’s economic agenda, insisting that the policies are fiscally responsible and that they would reduce costs for families at a time when prices are rising.

“The Build Back Better plan contains support for households to help address some of the most burdensome and most rapidly rising costs that they face,” Ms. Yellen said, pointing to proposals to make preschool free, provide expanded care for the elderly and increase education subsidies.

Republicans, who four years ago passed $1.5 trillion in tax cuts that went mostly to the rich, assailed the spending proposals as reckless. Ms. Yellen insisted that tax increases and an investment in the Internal Revenue Service to ensure that people and companies are paying the taxes they owe would prevent the legislation from adding to the debt.

“It is fully paid for, or even more than fully paid for,” Ms. Yellen said.

Others criticized the administration and Fed’s response to the virus and the risks it poses.

“At what point do we just get back to a more normal execution of Fed policy?” Thom Tillis, a Republican Senator from North Carolina, asked Mr. Powell, after stating that the virus is likely to remain present.

“We have to be humble about our ability to predict this, or really understand,” Mr. Powell replied, after saying that the central bank does not expect the new variant to have fallout that is “remotely comparable” to the initial pandemic-spurred state and local lockdowns.

Matt Phillips contributed reporting.

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