The wave of price increases that has complicated the US pandemic recovery could last longer than anticipated, Federal Reserve Chair Jerome Powell acknowledged Tuesday in testimony where he also opened the door to raising interest rates sooner.
It was a distinct change of tone for the central bank chief who for months tried to assuage fears by saying the recent inflation spike would be "transitory," and pledged to be patient before raising interest rates. He now says it is time to retire that term.
The uptick in inflation has put pressure on Powell and become a political liability for President Joe Biden, who is pushing Congress to pass a massive bill that would increase spending on social programs, climate projects and infrastructure.
"Clearly the risk of more persistent inflation has risen," Powell told the Senate Banking Committee.
The central bank's preferred price gauge surged five percent for the 12 months ending in October, well above the Fed's two-percent goal.
Powell pledged that the Fed "will use our tools to make sure that higher inflation does not become entrenched."
The Fed has already begun to pull back on its stimulus measures put in place to buffer the economy from the pandemic hit, but Powell, who Biden last week nominated to a second term as central bank chief, has previously said policymakers could be patient before raising lending rates.
However, he signaled in his testimony that it may be appropriate to speed up the pace of the pullback in monthly asset purchases.
That would mean the Fed would be in a position to raise the benchmark interest rate sooner.
Federal Reserve Chair Jerome Powell has changed his tune on inflation, and opened the door to raising US interest rates sooner Photo: AFP / JIM WATSON
At its last policy meeting, the Fed decided to begin reducing its monthly bond purchases, which at the current pace mean they would end in the middle of 2022.
But since then, data has shown "elevated inflation pressures, a rapid improvement in many labor market indicators" and "strong spending" that signals "significant growth in coming months," Powell said.
Therefore it is "appropriate, in my view, to consider wrapping up the taper of our asset purchases... perhaps a few months sooner."
The Fed slashed the benchmark lending rate to zero at the start of the pandemic, and Powell has said policymakers will not raise rates until the bond-buying program ends.
A growing number of Fed officials have publicly supported a faster taper and one or two rate increases next year, while some private economists are calling for three hikes.
Powell has for months described the burst of inflation fueled by supply chain snarls and shortages of goods and workers as "transitory," but told lawmakers it is time to "retire" the term.
He acknowledged that central bankers in their predictions missed the impact of the supply chain bottlenecks on prices.
Those global snags have caused shortages of a variety of products, while pent up demand for goods also have contributed to the burst of price increases.
