Gradually ease tensions: As US inflation soars, Jay Powell is under pressure
Jay Powell, Chairman U.S. Federal ReserveSo far, he has successfully steered the U.S. central bank and financial markets to his view that the surge in inflation sweeping the United States will be short-lived.
But after Tuesday, people’s confidence in this judgment was questioned. The increase exceeds expectations The consumer price index in June has sounded a new alarm for the degree of inflation in the world’s largest economy.
The data showed that the CPI rose 0.9% in June from the previous month — an increase of 5.4% year-on-year — and will put pressure on Powell to explain his position at this week’s congressional hearing.
This also increases the risk of greater divergence within the Fed on the next steps in formulating monetary policy.
Some officials at the Federal Open Market Committee believe that the U.S. Central Bank should quickly begin to reduce some of its support for the Federal Reserve. economic In view of strong output growth and high inflation in the United States, monthly asset purchases were cut by US$120 billion.
But Powell suggested that the Fed should proceed cautiously, on the grounds that the labor market is still far from fully recovering and inflationary pressures will eventually weaken. He was supported by several senior officials, including John Williams, president of the New York branch of the Federal Reserve.
“Continuously high [inflation] Peter Williams, an economist at Evercore ISI, said that printed matter will exacerbate FOMC tensions.
Williams added: “Some of the more hawkish members may point to the inflation pattern of the past few months, implying that the reduction should begin as early as September,” Williams added, although he predicted that “most members of the committee will now Support a temporary explanation”.
The CPI data released on Tuesday does not necessarily indicate that inflation is out of control: due to a combination of factors such as post-pandemic reopening, supply chain bottlenecks and energy, annual price increases are soaring. cost.
The “basic situation” of the Fed is that these pressures will subside over time.
Central bank officials also do not believe that long-term deflationary forces such as globalization and automation are fading.
Some Fed officials are still worried Delta variant The rapidly spreading coronavirus may harm U.S. demand, which may also inhibit price increases.
But the scope of June Consumer price increases It highlights that even if it is temporary, the period of soaring inflation in the US economy may be longer and more pronounced than previously expected.
For example, a sharp increase Used car prices Before the June data showed that inflation accelerated again, one of the main factors for rising inflation in the United States had weakened.
“If after a series of jaw-dropping numbers, people take a step back and say,’This is not a one-off, this is a trend.’… We may fall into a situation where inflation expectations are starting to rise,” a professor at the University of Chicago Business School, Former Fed governor Randall Kroszner (Randall Kroszner) said.
“This is very dangerous and problematic for the Fed.”
Market indicators of inflation expectations have indeed risen in recent days, but they have yet to show widespread concerns about loss of consumer price control.
A popular short-term indicator used as a proxy for expected inflation within two years is currently hovering at around 2.8%. Its long-term counterpart, the 10-year breakeven rate is less than 2.4%.
Kroszner said that the suppression of investor expectations underscores the Fed’s control of the inflation narrative.
“Suddenly, people are experiencing inflation that they have never seen before [in decades], But this did not scare the market, nor did it seem to scare individuals,” he said.
“This is a very difficult needle, and Jay and his colleagues at the Federal Reserve have been able to do this.”
Although Powell accepts the view that the inflation spike will be temporary, he also emphasized that the Fed will never be complacent about the danger of excessive price increases—if new data triggers panic, it is ready to take action.
“Forecasters have a lot to be humble. This is a highly uncertain business. We are very concerned about risks and carefully observe the data,” Powell said after the last FOMC meeting in June.
At the meetings of the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday, the Fed chairman may face criticism from Republicans who believe the Fed is too obsessed with its “loose monetary” policy.
Senator Pat Toomey, Republican of Pennsylvania, recently told the Financial Times that the central bank faces the risk of inflation risks “behind the curve.”
Nevertheless, Powell is not expected to suggest any changes in policy or communication when he appears before lawmakers this week.
“His remarks [inflation] Ian Katz of Capital Alpha Partners predicts: “We feel we have all this under control, we think it’s okay, but if the data changes, we can adjust accordingly”-this is basically what he wants to say.
He added: “This question will not surprise him, he will be prepared for it. Maybe his answer will not satisfy some people, but this is the answer they will get.”
At the same time, Democrats will pay close attention to Powell to ensure that the Fed will not shake the central bank’s new monetary framework. Compared with the past, the framework adopts a more relaxed attitude towards inflation, more stubbornly pursues full employment, and is unwilling to tighten policies based solely on the expectation of rising prices.
But especially after the data released on Tuesday, some people worried that the US Central Bank’s insistence on this plan would cause the economy to overheat.
“Of course there is an inflation factor that is temporary… but for anyone who talks to the company, they will quickly get the message that there are many things that are more lasting,” said Allianz chief economic adviser and bond group Pimco. Said Mohamed El-Erian, head of joint investment.