- Reopening and new stimulus will likely lift inflation later in 2021, Fed Chair Jerome Powell said.
- Still, the uptick will likely be small and only temporary, he added in a Tuesday Senate hearing.
- Powell said he expects the tendency for inflation to come in below the Fed’s target to linger.
- Visit the Business section of Insider for more stories.
Additional fiscal stimulus is expected to lift inflation, but the quarter-century trend of weak price growth will likely remain intact, Federal Reserve Chair Jerome Powell said Tuesday.
With Democrats plowing forward with efforts to pass a $US1.9 ($2) trillion stimulus plan, the focus has shifted from the package’s elements to its effect on inflation. Where Democrats argue the measure is necessary to fill the hole in the US economy, Republicans have warned the bill will overfill the hole and kickstart a worrying rise in inflation.
Several factors stand to accelerate price growth in the near term, Powell said while testifying to the Senate Banking Committee. Low data points from the start of the pandemic will soon be excluded from inflation measures’ annualized readings. That omission will make inflation seem to tick higher, but near-term price growth won’t have changed as much.
Economic reopening and new stimulus could also contribute to stronger inflation in the second half of 2020, but he said he doesn’t think “those effects should either be large or persistent.”
Inflation has consistently landed below the Fed’s 2% target for much of the past three decades. While runaway inflation can spark a new economic crisis, too-little inflation indicates an economy is operating below its full potential.
The central bank adjusted its inflation target in August to allow for brief periods of above-2% price growth, aiming to counterbalance years of weakness.
Inflation will likely be volatile as the economy rebounds and consumer spending bounces back, the chair said. Reopening-fueled price growth is ultimately “a good problem to have,” but it won’t derail the dynamics that drove decades of weak inflation, he added.
“Inflation dynamics do change over time, but they don’t change on a dime,” Powell said. “We don’t see how a burst of fiscal support or spending, that doesn’t last for many years, would actually change those inflation dynamics.”
The Fed chair also reassured senators the central bank is well prepared to tackle potential overshoots. Policymakers “have no intention of repeating” the inflation crisis of the 1970s and need to be humble when forecasting price growth, Powell said.
“If it does turn out that unwanted inflation pressures arise and are persistent, then we have the tools to deal with that,” he added.
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