Powell promises to prevent inflation in the long term

Federal Reserve Chairman Jerome Powell testifies before a hearing of the House Financial Services Committee in Washington, United States, June 23, 2022.

Mary F Calvert | Reuters

Federal Reserve Chair Jerome Powell vowed on Wednesday that policymakers would not allow inflation to grip the US economy longer term.

“The risk is that you start moving to a higher inflation regime because of the multitude of shocks. Our job is literally to prevent this from happening and we will prevent this from happening,” the central bank governor said. “We will not allow a transition from a low-inflation environment to a high-inflation environment.”

Along with three of his global counterparts, Powell continued to address a European Central Bank forum on US inflation, which is currently at its highest level in more than 40 years.

In the short term, the Fed has initiated several interest rate hikes in an attempt to curb rapid price increases. But Powell said it’s also important to contain inflation expectations longer term, lest they become entrenched and create a self-fulfilling cycle.

“Here’s a clock running where we’ve had inflation for more than a year,” he said. “It would be poor risk management to simply assume that these longer-term inflation expectations would remain anchored indefinitely given persistently high inflation. So we don’t do that.”

Since the Fed started raising rates in March, market indicators of inflation expectations have fallen significantly. A measure of the outlook for the next five years that compares inflation-linked government bonds to standard Treasuries fell to 2.73% this week from nearly 3.6% at the end of March.

However, other surveys show that consumers expect prices to continue to rise. One such move by the University of Michigan helped pressure the Fed to raise its benchmark interest rate by 0.75 percentage point at its meeting earlier this month.

The Fed is now tasked with dampening those expectations without crashing the economy. Powell said he’s confident that will happen, while acknowledging the risks ahead.

“We are determined to use our tools to bring down inflation. The way to do that is to slow growth and ideally keep it positive,” he said. “Is there a risk that would go too far? Certainly there is a risk. I would disagree that it is the biggest risk to the economy.