Fed Chair Jerome Powell Pivots to Inflation Fighting

Federal Reserve Chairman Jerome Powell said Tuesday that the Fed’s target for inflation had been reached and that the Fed would consider accelerating the wind-down of its easy-money policies in light of persistently high inflation.

The announcement marks a major pivot for Powell into an inflation-fighting mode. Until Tuesday’s testimony before the Senate Banking Committee, the Fed chair had emphasized the need for the Fed to proceed slowly and cautiously to avoid hurting the recovery by tightening too early.

“The economy is very strong and inflationary pressures are high,” Powell said. “It is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases … perhaps a few months sooner.”

The Fed  began to shrink its monthly bond purchases this month, a process known in the financial sector as “tapering.” At the pace announced for November and December, the Fed would stop adding to its bond portfolio in June—although it would continue to make new purchases to replace bonds as they matured.

At Tuesday’s hearing, Powell signaled that Fed officials would discuss a speedier wind-down of the purchases when the Fed’s policy committee next meets in mid-December. That would put the Fed on a path to likely raising rates as early as the first half of next year.

Powell’s remarks at the hearing cleared up some confusion created by the release of his prepared remarks the night before. Some interpreted references to the omicron variant as a signal that the Fed would become more cautious about tightening, perhaps slowing the wind down while it waited to see the impact on the economy. Others thought the references pointed in a “hawkish” direction, signaling a more aggressive stance on fighting inflation.

When the pandemic first struck, the Federal Reserve and the U.S. Treasury acted together. Both monetary policy and fiscal policy were loosened to provide ample liquidity to the economy, pumping up incomes, savings, and spending in an attempt to stave off the kind of fall in demand that can trigger economic slumps in times of unexpected shocks or crises. The economy briefly entered a very deep recession last year but exited almost immediately once the severest restrictions on economic activity were lifted.

This year, it became clear that the longer-lasting effects of the virus on the economy were on the supply side. Instead of the brief hiccup in supply chains and employment levels that many at the Fed expected, low labor market participation and supply chain problems have persisted and even spread. Coupled with robust demand for homes and goods such as appliances, cars, and furniture from consumers pumped full of stimulus money and low levels of unemployment, this has created the conditions for high and rising inflation at the very time Fed officials thought inflation would be fading.

The risk now is that omicron could lead to factory and port shutdowns around the world. It may also make some Americans now on the sidelines hesitant to return to the workforce. The migration of spending from goods to services could be thwarted or reversed if people turn away from eating out and travel again to avoid infection or just the inconveniences of mask requirements and social distancing.

“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”

The idea of tightening monetary policy earlier got bipartisan support at Tuesday’s hearing. Several Republicans, including the panel’s ranking member Sen. Pat Toomey (R-PA), urged Powell to speed up the bond-purchase wind-down and move away from the central bank’s ultra-accommodative stance. They were joined by Sen. Mark Warner (D-VA) on Tuesday.

“I do hope that you will move more aggressively on this tapering,” says Warner, one of the leading Democratic moderates.

Senator Joe Manchin (D-WV) has been publicly fretting about inflation and pushing Powell for an end to bond-buying for months.

Questioned about Powell’s earlier insistence that inflation was transitory, Powell insisted he had been misunderstood. The word transitory was not meant to convey the idea that inflation would be short-lived but merely that it would not permanently result in higher inflation, Powell said.

“It’s probably a good time to retire that word and try to explain more clearly what we mean,” he said.

For over a year now, Powell has been emphasizing the Fed’s mandate to maximize employment, arguing that this meant not only lowering the overall unemployment rate but making sure the benefits were spread more equitably. On Tuesday, Powell acknowledged that the burden of high inflation also hurt equality, saying it “imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation.

Powell got the nod for a second term as Fed chair last week from President Joe Biden. Some Fed-watchers think that may have made Powell feel less pressure to continue to advocate for an accommodative stance.

Stocks fell sharply on Powell’s hawkish stance on Tuesday, with the Dow Jones Industrial Average, the S&P 500, and the Russell 2000 each falling around 1.9 percent. The Nasdaq Composite declined 1.55 percent.

—The Associated Press contributed to this report.