Powell: Rampant inflation ‘not a problem’ in recovery from COVID-19

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

Powell told members of a Senate panel that while technical factors and the release of pent-up savings may push prices higher 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 the Senate Banking 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.”

Powell has tried 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.

“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 panel’s ranking Republican, referring to rising Treasury bond yields, increasing producer prices and soaring stock and commodity prices.

While Powell has not taken a position on Biden’s bill, he’s consistently called for further aid and warned against underestimating the stimulus needed to recover from the pandemic-driven recession.

“Once we get this pandemic under control, we could be getting through this much more quickly than we had feared, and that would be terrific, but it’s not done yet the job is not done,” Powell said.

Biden, his White House team and the Fed have insisted that the risks of rampant inflation following the pandemic are far less than the dangers of doing too little to support the economy.

Biden and supporters of his approach often point to the 2008 recession as a cautionary tale, blaming the sluggish recovery that followed on insufficient stimulus and premature spending cuts.

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

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, central banks have struggled to reach 2 percent inflation and the relationship between government debt, low unemployment and price increases is far weaker than it used to be, they argue.

“We may see upward pressure on prices as the economy fully reopens, which is a good problem to have,” Powell said. “I don’t think that those effects should either be large, or persistent, and the real reason for that is that we’ve had decades of well anchored inflation expectations.”