WASHINGTON — Federal Reserve Chair Jerome Powell on Tuesday responded to concerns from Republican lawmakers about spiking inflation by reiterating his view that current price increases will likely prove temporary.
Consumer prices jumped 5% in May compared with a year earlier, the largest increase in 13 years. Republican House members have sought to blame higher inflation on President Joe Biden's $1.9 trillion economic relief package, approved in March, in an effort to retake the House next year.
"The Biden inflation agenda of too much money chasing too few goods is causing major harm to hardworking families," said Louisiana Rep. Steve Scalise, the second-ranking Republican House leader.
Powell avoided participating in such policy debates, despite attempts from both Democrats and Republicans to draw him in.
But he said in testimony before a congressional oversight panel that recent price gains mostly reflected temporary supply bottlenecks, and the fact that prices fell sharply last spring at the onset of the pandemic, which make inflation figures now, compared with a year ago, look much larger.
Most of the price gains have occurred in categories such as used cars, airplane tickets, and hotel rooms, Powell said, where demand has soared as the economy has quickly reopened, catching many companies flat-footed.
"Those are things that we would look to, to stop going up and ultimately to start to decline as these situations resolve themselves," Powell said. "They don't speak to a broadly tight economy — the kind of thing that has led to high inflation over time."
Powell acknowledged that "these effects have been larger than we expected and they may turn out to be more persistent than we expected." But he added that "the incoming data are very much consistent with the view that these are factors that will wane over time and then inflation will then move down toward our goals."
The Fed chair did not specify which data he was referring to, but the prices of many commodities, such as lumber and copper, which had risen sharply during the pandemic, have tumbled in recent weeks.
Powell's comments come at a time when financial markets are struggling to interpret the Federal Reserve's recent moves. Last week Fed officials signaled that they may increase the central bank's benchmark interest rate twice in 2023, an earlier time frame than they set out in March, when no rate hike was expected until after that year. Changes to the Fed's benchmark rate affect a wide range of consumer borrowing costs, such as mortgages, credit cards, and student loans.
Powell also said last week that the Fed had formally begun discussing when and how the central bank might reduce the current $120 billion a month of Treasurys and mortgage-backed bonds that the Fed is purchasing. Those purchases are intended to keep longer-term interest rates lower to encourage more borrowing and spending.
Both moves were seen as evidence that the Fed wanted to indicate it was prepared to keep inflation in check without initially taking any steps to pull back on its efforts to stimulate the economy.
Some Fed officials are not fully convinced that inflation is temporary. St. Louis Fed President James Bullard said Monday that the economy is in unprecedented territory, making it hard to know where inflation will go next. But he added that, "we have to be ready for the idea that there are upside risks to inflation, (it) could go higher" than the 2.5% rate he has forecast for next year.
Yet other officials echoed Powell's views. Also on Monday, New York Federal Reserve Bank President John Williams, who also serves as vice chair of the Fed's policymaking committee, said that currently high inflation is likely transitory.
"I expect that as price reversals and short-run imbalances from the economy reopening play out, inflation will come down from around 3% this year to close to 2% next year and in 2023," Williams said.