The Chairman of the Federal Reserve (FED), Jerome Powell, admitted during a hearing before the Senate Banking Committee that inflation will not be transitory. Powell stated that it will take “a good time to retire that word [transitory] and try to explain more clearly what we mean.”
For months the FED tried to keep the markets calm by assuring that inflation would be transitory and its increases were explained by circumstantial factors such as bottlenecks in the supply chain, the shortage of workers because of government-mandated policies, including extended public benefits, or the hacking of the Colonial pipeline.
In early November, the FED announced that it would limit its purchases of both government and corporate bonds to begin to limit the flow of cash into the economy. Powell announced that it would phase out monthly purchases of more than $120 billion in debt bonds by $15 billion.
Inflation will not be transitory and will affect the growth of the U.S. economy
In the face of concerns about persistent inflation, Powell stated that the FED’s cap on debt purchases will have to be accelerated. According to The Wall Street Journal, if FED officials are serious, they will have to accelerate cuts in bond purchases by more than $30 billion a month.
The FED’s official goal is to keep inflation at about 2%, a goal that seems unrealistic for the Open Market Committee in the short to medium term unless the central bank manages to get the immense flows of money disbursed over the past two years out of circulation.
As much as a quarter of the money circulating in the U.S. economy today was issued since the pandemic began. Some analysts believe that the FED will not only have to limit the purchase of debt bonds, but will also have to raise the interest rates at which the Central Bank lends to commercial banks as soon as possible.
“The risk of higher inflation has grown,” Powell said during the hearing and warned that the emergence of the Omicron variant of the coronavirus could hamper job recovery.
The New York FED expects inflation in the near term to be around 5.7% annually, while medium-term inflation will moderate to around 4.2%.
“To get back to the great labor market we had before the pandemic, we will need price stability,” Powell told the committee.
All major stock indexes suffered a drop following the announcement that inflation would not be transitory, with the Nasdaq technology markets index falling particularly persistently.
Inflation would also affect governance by the Biden administration, which enjoys low popularity ratings at present. The inflationary expectation could also seriously impact the negotiation in the Senate to approve the executive’s human capital plan, the amount of which had to be reduced to $1.75 trillion, after having proposed a figure of almost $3 trillion during the beginning of his term as president.