Powell pushes back on GOP inflation fears

Federal Reserve Chairman Jerome Powell told senators on Tuesday that rampant inflation is “not a problem” to fear amid the recovery from the coronavirus recession.

In testimony before the Senate Banking Committee, Powell said that while the release of pent-up savings may contribute to higher prices when the pandemic subsides, it won’t be enough to reverse decades of downward pressure on inflation.

“We’ve averaged less than 2 percent inflation for more than the last 25 years,” Powell told members of the committee, referring to the Fed’s annual inflation target.

“Inflation dynamics do change over time, but they don’t change on a dime, so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” he said.

Powell has for months tried to dispel concerns about the potentially inflationary impact of trillions in fiscal and monetary support for the struggling U.S. economy. Republican lawmakers, some Wall Street analysts and even a handful of center-left economists have expressed fears that President Biden’s $1.9 trillion relief bill and Fed measures could overheat the economy as the pandemic eases.

Treasury bond yields have risen steadily over the past two weeks, reflecting fears among traders that interest rates could soon jump to contain upward pressure on prices. Inflation hawks are also alarmed by rising commodity and producer prices.

“There are a lot of warning signs that have not been worrisome in the past but now are certainly blinking yellow,” said Sen. Pat Toomey (Pa.), the Banking Committee’s ranking Republican.

“At some point, we’ve got too much liquidity going into the system. The economy is recovering very, very well. Problems are isolated and should be addressed narrowly.”

Toomey is one of many GOP lawmakers fiercely opposed to Biden’s relief package and in favor of a much smaller aid bill. After approving more than $4 trillion in coronavirus aid in 2020, Republicans say another stimulus bill is unnecessary with unemployment dropping to 6.3 percent last month and the end of the pandemic in sight.

Powell, a Republican fiscal hawk himself, disagrees with many of those inflationary concerns.

While Powell has not taken a position on Biden’s bill, he has consistently called for further aid and warned against underestimating the stimulus needed to recover from the pandemic-driven recession. On Tuesday, he cited the 10 million jobs lost last year that have not been regained, the pandemic’s vastly disproportionate burden on the poorest 25 percent of Americans and the millions of working-age adults who left the labor force because of COVID-19.

For those reasons, Powell said, the Fed will not hike interest rates or taper its monthly purchases of Treasury and mortgage bonds until the economy has returned to full employment and inflation has risen to the bank’s annual 2 percent target and is on pace to exceed it.

“There’s a long way to go, and monetary policy is accommodative and needs to continue to be accommodative,” Powell said. “We’ve had three months of 29,000 jobs [added] a month. That’s not very much progress.”

Powell also fielded questions about inflation from GOP Sens. Steve Daines (Mont.), Mike Rounds (S.D.), Tim Scott (S.C.) and Richard Shelby (Ala.). On Wednesday, Powell will testify before the House Financial Services Committee.

The Fed chairman’s laser focus on a full labor market recovery is a reflection of the central bank’s fundamental shift in the way it’s balancing its dual mandate of maximum employment and price stability. The Fed in August embraced a new framework that explicitly called for letting inflation run slightly above its 2 percent target long enough to compensate for years of staying below that level.

Inflation hawks, however, fear the Fed and Biden risk recreating the economic mire of the 1970s, when the central bank was forced to hike rates substantially and trigger a recession after years of deficit spending and low interest rates spurred uncontrollable price increases.

Powell and Treasury Secretary Janet Yellen — his predecessor at the Fed — insist that the economy has fundamentally evolved from the inflation nightmare of the 1970s. For nearly two decades, inflation has struggled to reach 2 percent a year and the relationship between government debt, low unemployment and price increases is far weaker than it used to be, Powell and Yellen have argued.

Powell said Tuesday that what hawks are interpreting as a precursor to inflation should actually be seen as signs of an expected economic rebound.

“They’re related to expectations of greater confidence in a stronger recovery,” Powell said. “We saw commodity prices move up a lot in 2009 and people were worried about inflation. Inflation never came.”

Powell added that the bigger risk is not reliving the 1970s but the sluggish recovery that occurred after the Great Recession of 2007-2009.

“Once we get this pandemic under control, we could be getting through this much more quickly than we had feared,” Powell said.

“That would be terrific, but it’s not done yet.”