High inflation is a ‘severe threat’ to Fed’s employment goals, Jay Powell says

High inflation is a “severe threat” to the Federal Reserve’s employment goals, chair Jay Powell told US lawmakers during his confirmation hearing on Tuesday, as he sketched out the US central bank’s plans to tighten monetary policy this year.

In testimony to the Senate banking committee, Powell, who was nominated by President Joe Biden in November to serve a second term leading the Fed, said the economy no longer “needs or wants” the “highly accommodative” policies that have been in place since the onset of the pandemic.

He also warned that entrenched inflation could jeopardise what had been a historically strong expansion.

“To get the very strong labour market we want with high participation, it is going to take a long expansion. [And] to get a long expansion, we are going to need price stability,” Powell said.

“High inflation is a severe threat to achieving maximum employment and to achieve the long expansion that could give us that.”

Powell acknowledged the “toll” caused by high inflation, and affirmed the Fed’s intention to use its tools to ensure it did not become a more pernicious problem.

He told US lawmakers the Fed would raise rates more aggressively if necessary and laid out the central bank’s plans to begin the “long road” to more normal monetary policy this year.

Powell’s testimony comes ahead of the latest inflation report, which on Wednesday is expected to show the consumer price index rising at an annual clip of 7 per cent, the fastest pace in four decades.

When Biden announced Powell’s renomination in November, the president made clear that containing inflation was a top priority of his administration. He added that he saw Powell and Lael Brainard, the central bank governor he tapped for the role of vice-chair, as best placed to steer the US economy towards a more robust recovery.

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

In the weeks that followed the nomination, the Fed embarked on an abrupt policy pivot, jettisoning its characterisation of inflation as “transitory” and embracing a more aggressive approach to ensure higher US consumer prices did not become rooted.

Not only did the Fed accelerate the speed at which it winds down its stimulus programme, but it prepared financial markets for the prospect of three interest rate increases this year and a move to shrink the size of its huge balance sheet at some point this year.

“I would expect this year, 2022, will be a year where we take steps towards normalisation,” Powell said, adding that the “run-off” process — in which the Fed ceases to reinvest the proceeds of its maturing securities — would happen “sooner and faster” than the last time it did so, beginning in 2017.

Economists expect the Fed to commence “lift-off” in March and begin reducing its portfolio of securities soon afterwards, a sequence many senior officials have since publicly backed.

Goldman Sachs has predicted subsequent rate increases in June, September and December after the March move. The bank projected the Fed to cease reinvesting the proceeds from its maturing securities in July.

New jobs data published on Friday, which showed the unemployment rate plummeted below 4 per cent despite a sharp slowdown in the pace of monthly jobs gains for December, further emboldened bets of a March rate rise.

Wage growth has also climbed sharply as a record number of Americans quit their jobs. Economists said the economy was close to, if not already at, maximum employment, the second goal set forward by the Fed to gauge the appropriate time to move its main policy rate away from zero.

The first goal, for inflation to average 2 per cent over time, has been “more than met”, Fed officials have said.

When asked by Elizabeth Warren, the Democratic senator from Massachusetts, about big corporations raising prices, Powell said it could reflect the fact that demand was “incredibly strong”.

“They are raising prices because they can,” he added.

In choosing Powell, a Republican who was first appointed in 2017 by former president Donald Trump, Biden rejected criticism from the progressive wing of his party about the chair’s regulatory record, which they said led to a dilution of the post-global financial crisis rules guiding the nation’s largest banking institutions.

They have also taken issue with Powell’s stance on issues related to climate change and called for a leader who would take a more proactive approach to considering related financial risks.

A trading scandal that erupted last year — which intensified following new disclosures by Richard Clarida, the Fed vice-chair — has drawn criticism from progressives, too.

Warren pressed Powell again on Tuesday to provide “all available information” about personal financial transactions made by its officials by January 17, a request she issued on Monday.

Clarida, whose four-year term was set to expire at the end of the month, announced on Monday that he would step down from his position this week after he was discovered to have been more active in financial markets than previously disclosed.

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

Powell on Tuesday said the new guidelines amounted to a “complete change” in the way officials’ trading activity is governed.

“There will be no ability to time the market,” he said.

Clarida is set to be replaced by Brainard, who will face the Senate banking committee on Thursday for her confirmation hearing.