– Fed is faced with an unprecedented phenomenon of inflation
The surge in inflation following the reopening of the US economy after the corona crisis caught the US Federal Reserve cold.
The inflationary surge associated with the reopening of the US economy after the corona crisis has apparently caught the Fed off guard. At a hearing in the US Senate, Fed Chairman Jerome Powell admitted on Thursday that this historically “one-time” inflation was higher than the Fed “or anyone” had expected.
Unlike in earlier economic phases, it is not accompanied by a hot labor market. Rather, with the reopening “a shock went through the system” and drove inflation far above the two percent mark targeted by the Fed: “Of course, we do not see it relaxed.” In June consumer prices rose by a surprisingly strong 5.4 percent year-on-year and had fueled speculation about an early turnaround in interest rates.
Powell is currently not planning a reaction
As long as inflation proves to be temporary, there is no reaction to it, stressed Powell. But if, contrary to expectations, it should drag on longer, the risks would have to be assessed further – especially with a view to inflation expectations. The Fed is promoting the economy with its monetary policy. This will stay that way for a “long time”, even if the central bank should ultimately shut down its bond purchases and even after an interest rate hike.
Powell had confirmed in the House of Representatives the day before that the high inflation rate was temporary and would give way “in the coming months”. In addition, the labor market is still “a long way” from the level at which the central bank will cut back monetary policy support for the economy. Nevertheless, the Fed will deal with the meltdown of purchases at the end of July.
The Fed is supporting the economy hit by the corona crisis with the purchase of government bonds and mortgage securities (MBS) worth $ 120 billion a month. It intends to hold onto this until substantial progress has been made in terms of price stability and the labor market.
Yellen sees increased inflation as temporary
US Treasury Secretary Janet Yellen affirmed in a radio interview on Thursday that the current high inflation will only be temporary. However, the acceleration in prices must be observed very carefully, said Yellen to the “National Public Radio”. Inflation will not go away in the next month. In the medium term, however, this should be the case.
Yellen also expressed concern about the housing market. In an interview with “CNBC”, she said that families who wanted to buy a property for the first time were exposed to pressure in the face of high prices. Congress will look at plans by President Joe Biden’s administration to increase the supply of affordable real estate.
She also praised the US Federal Reserve. You have respect for the Federal Reserve. It is also important that they can make independent decisions. “I think the Fed did a good job.”