The US could face more inflation ‘surprises’: Fed’s Powell

The US economy faces an “uncertain” global environment and could face further inflation “surprises,” Federal Reserve chair Jerome Powell said on Wednesday.

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” Powell said in his semi-annual testimony to Congress.

“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell said. The Fed in coming months will be looking for “compelling evidence” of slowing price pressures before it eases up on the interest rate increases it kicked off three months ago.

Inflation continues to run at least three times higher than the Fed’s targeted level of 2%. A gauge of price increases that excludes volatile food and energy costs may have eased somewhat last month, Powell testified, but Russia’s invasion of Ukraine and COVID-19 lockdowns in China are putting continued upward pressure on inflation.

One week ago, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point – its biggest hike since 1994 – to a range of 1.50% to 1.75%, and signaled rates would rise to 3.4% by the end of this year.

In his opening remarks, Powell insisted the US economy “is very strong and well positioned to handle tighter monetary policy.”

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” the Fed chief said in his semi-annual appearance before Congress.

Inflation

Policymakers “will need to be nimble” given that the economy “often evolves in unexpected ways,” he said.

The Fed is facing intense criticism that it was too slow to react to the changing economy, which benefited from a flood of federal government stimulus.

Last week’s super-sized 0.75-percentage-point increase in the benchmark lending rate was the third since March, taking the policy rate up a total of 1.5 points. Powell at the time said a similar increase was likely in July.

The ideal scenario would be for those moves to cool the economy enough to douse inflation pressures, without choking off growth — the hoped-for “soft landing.”

He said the pace of future rate hikes will depend on whether — and how quickly — inflation starts to decline, something the Fed will assess on a “meeting by meeting” basis. 

The central bank’s accelerating rate increases — it started with a quarter-point hike in its key short-term rate in March, then a half-point increase in May, then three-quarters of a point last week — has alarmed investors and led to sharp declines in the financial markets.

Powell’s testimony comes exactly a week after the Fed announced its three-quarters-of-a-point increase, its biggest hike in nearly three decades, to a range of 1.5 per cent to 1.75 per cent.

With inflation at a 40-year high, the Fed’s policymakers also forecast a more accelerated pace of rate hikes this year and next than they had predicted three months ago, with its key rate reaching 3.8 percent by the end of 2023. That would be its highest level in 15 years.

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