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The U.S. Federal Reserve will not raise interest rates or curtail its $120-billion-a-month bond-buying program any time soon, Fed chair Jerome Powell told Congress on 14 June, despite inflation shooting to 5.4 percent year-on-year last month, its fastest clip in 13 years, as the U.S. labor department reported.
High inflation is “transitory,” Powell said again in testimony to the House Financial Services Committee.
The high rate of inflation “is a shock going through the system associated with re-opening the economy,” he acknowledged, adding that the Fed “isn’t comfortable” with inflation running at its current headlong pace.
However, it would be a mistake to make policy changes that would ripple through the economy when inflation is being driven by a small number of services, such as airfares and car rental rates, or a few goods, such as passenger vehicles, he said.
The Fed is monitoring inflation to see if it spreads more widely across the economy, he told Congress.
The Fed is ready to “adjust monetary policy as appropriate if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal,” he said.
“Substantial further progress” in righting the economy “is still a ways off,” he noted.
When lawmakers expressed anxiety that high inflation was becoming entrenched, Powell asked his questioners to keep “faith” in the Fed’s judgment and warned that tightening policy too soon is a greater risk than adjusting it too late.
“We really do believe, and virtually all forecasters do believe, that these things will come down of their own accord as the economy reopens,” he noted. “It would be a mistake to act prematurely.”
Still, Powell admitted that the Fed was feeling its way through the current turmoil.
“We don’t have another example [to follow] of the last time we re-opened a $20-trillion economy with lots of fiscal and monetary support,” he said.
The S&P 500, the Dow Jones Industrial Average, and bond prices rose on Powell’s reassurance that policy would not change any time soon.
The flood of cheap money has enabled a record number of stock issues, corporate buyouts, and mergers, giving Goldman Sachs, JP Morgan, and other investment banks record earnings from fees collected by managing the deals (see related story).
As Powell testified, the Fed released its Beige Book, formally called the Summary of Commentary on Current Economic Conditions, an eight-times-a-year collection of anecdotes and comments from business executives about economic conditions.
Some who were surveyed “felt that pricing pressures were transitory,” the report said, while “the majority expected further increases in input costs and selling prices in the coming months.”
Some analysts fear that if the Fed fails to tighten policy gradually beginning soon, inflation might keep surging, which could force the Fed to slam on the monetary brakes harder and more suddenly in the future, crashing financial markets, The Wall Street Journal said.
TRENDPOST: Despite Powell’s hollow call for “faith” in the Fed’s judgment, day-to-day volatility in equity markets shows that investors already are poised to jump off the central bank’s gravy train when the Fed raises rates or curtails its bond-buying spree.
In a separate story this week, we report that Blackrock, the world’s largest asset manager, is raising pay 8 percent for 95 percent of its employees. When companies begin to raise wages during an inflationary time, that risks setting off an inflationary spiral, in which costs rise, so employers pay more, but they have to charge more to cover the higher pay for employees, so they raise prices, hiking costs for their customers.
However, as we forecast, while inflation is not transitory, should a wild card event such as a 1929 style stock market crash hit overvalued equities, core inflation will decline. And as to whether or not the Federal Reserve will raise interest rates as inflation rises, we suggest you read Gregory Mannarino’s article, “Expect Inflation to Rise Rapidly, Along with A New Feudal System.”
TREND FORECAST: Inflation registered 5.4 percent in June, upping the pressure on the central bank to raise rates. We maintain our forecast that the Fed will raise rates before 2023, with a growing likelihood that the first hikes will come this year.