Republican lawmakers prodded Federal Reserve Chairman Jerome Powell over growing inflation as he conceded that it has gotten higher than the central bank anticipated.
Powell testified before the Senate Banking Committee on Thursday and faced sharp questions about the Fed’s prediction that inflation is only transitory and will sink back down in the coming months and over the next year. Several lawmakers pointed out that the Fed’s previous projections have fallen short of actual levels of inflation, and in light of that, questioned the central bank’s reassurance on the matter.
The Fed has declined to raise its interest rate target from near-zero despite the higher-than-wanted inflation, although recent meetings have shown that it is now targeting a rate hike next year and not in 2023 as it previously forecast. Still, some economists think that the easy money policies are too dangerous, given the excessive amount of recent spending and planned federal spending.
“I’m concerned that the Fed’s current paradigm almost guarantees that it will be behind the curve if inflation becomes problematic and persistent,” said GOP Sen. Pat Toomey of Pennsylvania.
During the Thursday hearing, Powell said that the Federal Reserve, which is targeting sustained 2% inflation, is concerned about the current pace of inflationary growth. He said that the number is larger than anyone had expected.
“This is not moderately above 2% by any stretch, this is well above 2%, and we understand that,” he told the committee. “This is a shock going through the system associated with reopening of the economy, and it's driven inflation well above 2%. Of course, we are not comfortable with that.”
Powell said that the longer that too-high inflation persists, the Fed will have to continue to reevaluate its monetary policy.
This week, the Department of Labor announced that consumer prices increased 5.4% for the year ending June, which represents the highest rate of inflation since 2008. Republican Sen. Steve Daines drew upon the news during his questioning and said that families in his state of Montana are already feeling the strain of higher prices.
Republican Sen. Mike Rounds of South Dakota brought up the fact that Democratic lawmakers are plotting a multitrillion-dollar spending package and wondered what tools the central bank has at its disposal to combat even more inflation that might be spurred on by lawmakers adding “additional fuel to the fire.”
Powell, whose bank is not supposed to weigh in on fiscal or political policy, pointed out that central bank staff evaluate the goings-on of Congress and will revise the forecast based upon changes to fiscal policy that are carried out or appear poised to be carried out.
Sen. Richard Shelby drew parallels between right now and past high inflation in the United States.
“If we fail to take inflation seriously, Mr. Chairman, I am concerned that our nation could be faced with the same challenges of years ago,” the Alabama Republican told Powell. Shelby asked if the central bank chief was concerned about the high prices.
“Of course,” Powell responded. “We are night and day. We’re all thinking about that and really asking ourselves if we have the right frame of reference, the right framework to understanding this.”
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