Wed. Jan 26th, 2022

The Federal Reserve is prepared to take steps to ensure that rising inflation is not hedged, Chairman Jay Powell will repeat on Tuesday during his confirmation hearing to U.S. lawmakers.

In testimony to be sent to the Senate Banking Committee, Powell – who was nominate by President Joe Biden in November to serve a second term leading the US Federal Reserve – will nod to the speed of economic recovery, the strength of the labor market and the costs imposed by high inflation.

“The economy has gained momentum quickly despite the ongoing pandemic, which has led to persistent supply and demand imbalances and bottlenecks, and thus to rising inflation,” he said in prepared remarks.

“We know that high inflation takes a toll. . . we will use our tools to support the economy and a strong labor market and to prevent higher inflation from being entrenched, ”he added.

Powell will testify before the latest inflation report, which is expected to show on Wednesday that the consumer price index is rising at an annual average of 7 percent, the fastest pace in four decades.

Powell stressed the importance of flexibility in the Fed’s approach, arguing that monetary policy should “take a broad and forward-looking view, keeping pace with an ever-evolving economy”.

When Biden announced Powell’s reappointment in November, he made it clear that curbing inflation was a top priority of his administration. He added that he saw Powell and Lael Brainard, the central bank governor he nominated for the role of vice president, as the best placed to steer the US economy towards a stronger recovery.

“I believe Jay is the right person to see us through and complete that effort while also addressing the threat. [that] inflation. . . impose [on] our families and our economy, ”Biden said at the time.

In the weeks following the nomination decision, the Fed suddenly started policy pivot, which abandons its characterization of inflation as “perishable” and instead embraces a more aggressive approach to ensuring that higher US consumer prices are not hedged.

Not only has the Fed accelerated as quickly as it shuts down its stimulus program, but it prepare financial markets for the prospect of three interest rate hikes this year and a move to reduce the size of its massive balance sheet sometime in 2022.

Economists now expect the Fed to begin “lifting” in March and shortly thereafter begin to shrink its portfolio of securities – a sequence that many senior officials have since publicly supported.

Goldman Sachs predicts subsequent rate hikes in June, September and December after the March move. He expects the Fed to stop reinvesting the proceeds of its securities in July.

Minutes of December’s policy meeting also seen a similar timeline, with the record indicating that policymakers see interest rate hikes “sooner or at a faster pace” than initial estimates as justified given the speed of economic recovery.

New job data on Friday, showing unemployment rate cellar below 4 percent despite a sharp slowdown in the rate of monthly earnings for December, betting from a March rate hike further encouraged.

Wage growth has also risen sharply as a record number of Americans quit their jobs. Economists say the economy is close to, if not already at, maximum employment, the second goal set by the Fed to set the appropriate time to shift its key policy rate from zero.

The first target, for inflation to average 2 percent over time, is “more than achieved,” Fed officials said.

Powell has previously justified the Fed’s falconry move despite the fact that there are still 3.6 million fewer jobs than before the pandemic, arguing that stable prices are essential for a long and steady economic recovery.

With the choice of Powell, who is a Republican and was first appointed by former President Donald Trump in 2017, Biden rejected criticism of his party’s progressive wing over the president’s regulatory record – which they said led to a dilution of the post-global financial crisis rules that guide the country’s largest banking institutions. They also had a problem with Powell’s position on issues related to climate change and instead asked a leader who would take a more proactive approach to thinking about related financial risks.

Powell is also likely to face questions about the trade scandal that erupted under his watch and was resume last week when new revelations from Richard Clarida, the vice chairman, indicated that he was more active in financial markets than he first revealed.

Clarida, whose term of four years expires at the end of the month, announced On Monday, he retires from his post this week.

The Fed in October announced rules that significantly curtailed the transactions of senior staff, but the latest trades, which took place around highly sensitive policy decisions in the early days of the pandemic, once again undermined the central bank’s credibility.

Clarida is expected to be replaced by Brainard, who faces the Senate Banking Committee on Thursday for her confirmation hearing.

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