Defiant Powell Tells Congress to ‘Have Faith,’ Says Stimulus Will Continue, Predicts Inflation Will Subside
Federal Reserve Chair Jerome Powell struck a stance of cool defiance when it comes to concerns over inflation surging.
Powell said Wednesday that he expects inflation, which has been rising by much more than expected for the past four months, “will likely remain elevated in coming months” before “moderating.”
This is an indication that the Fed is not ready to change course from its declared plan to keep rates low for an extended period of time even though growth and inflation are running hotter than expected.
In testimony before the House Financial Services Committee, Powell faced many questions, particularly Republicans, about whether the Fed was being cavalier in ignoring higher than expected inflation. Democrats too challenged Powell to better explain why he is not worried about escalating prices, especially in the housing market, where escalating prices have put homes out of reach for lower income Americans in many areas.
“How much longer can we have this kind of sustained inflation before you become nervous?” Rep. Frank Lucas (R-OK) asked, pointing out that the Fed had to raise rates dramatically and induce a recession to reduce inflation in the early 1980s.
“If we see that inflation is moving up or on a path to be well above our goals or the risk of sending on us on a path of high inflation, then we will use our tools to guide it back down. So in the end it will be transitory,” Powell said. “People need to have faith in the central bank that we will do that.”
Powell reiterated his long-held view that high inflation readings over the past several months have been driven largely by temporary factors, notably supply shortages, and rising consumer demand as pandemic-related business restrictions are lifted.
Once such factors normalize, Powell said, inflation should ease. Yet the Fed chair did not repeat in his testimony an assertion he made three weeks ago before another House panel, that inflation would “drop back” to the Fed’s target of 2 percent.
The Fed has said it will keep its benchmark short-term rate pegged near zero until it believes maximum employment has been reached and annual inflation moderately exceeds 2 percent for some time. The central bank’s policymakers have said they are prepared to accept inflation above its target to make up for years of inflation below 2 percent.
The Fed chair also said Wednesday that the economy is “still a ways off” from making the “substantial further progress” that the policymakers want to see before they will begin reducing their $120 billion in monthly bond purchases. Those purchases are intended to keep long-term borrowing rates low to encourage borrowing and spending.
Powell added that the Fed might adjust its policies if inflation, or the public’s expectations for inflation, “were moving materially and persistently beyond levels consistent with our goal.” Americans’ expectations for inflation are important because they can become self-fulfilling. If consumers foresee higher prices, they typically demand higher pay in response. Businesses may then further raise prices to compensate for the increased wages.
The chairman is testifying to the House committee as part of his twice-a-year monetary policy report to Congress. On Thursday, he will testify to the Senate Banking Committee.
Powell’s remarks coincided with a government report Wednesday that showed wholesale prices — which businesses pay — jumped 7.3 percent in June from a year earlier, the fastest 12-month gain on records dating to 2010.
On Tuesday, in another sign of intensified inflation pressures, the government said that prices paid by U.S. consumers surged in June by the most in 13 years. It was the third straight month inflation has jumped. Excluding volatile food and energy costs, so-called core inflation rose 4.5 percent in June, the fastest pace since November 1991.
Much of the consumer price gain was driven by categories that reflect the reopening of the economy and related supply shortages. Used car price increases accounted for about one-third of the jump. Prices for hotel rooms, airline tickets, and car rentals also rose substantially.
“The fact that the recent run-up in inflation has been dominated by a few categories should give the Fed leadership continued confidence in their view that it is mostly a transitory increase, a view which the market apparently shares,” Michael Feroli, an economist at JPMorgan Chase, said this week.
But some increases could persist. Restaurant prices rose 0.7 percent in June, the largest monthly rise since 1981, and have increased 4.2 percent compared with a year ago. Those price increases likely are intended to offset higher wage and food costs as restaurants scramble to fill jobs.
In his testimony, Powell was upbeat about the economy, with growth on track “to post its fastest rate of increase in decades.” He said hiring has been “robust” but noted there “is still a long way to go,” with the unemployment rate elevated at 5.9 percent.
At their most recent meeting last month, Fed officials forecast that they may raise their benchmark short-term rate twice by the end of 2023, an earlier time frame than they had previously signaled.
Fed officials mobilize to reassure Wall Street
Top officials of the US Federal Reserve, starting with Chairman Jerome Powell, have pulled out all stops to reassure financial markets there will be no immediate tightening of monetary policy, and the flow of money that has sent Wall Street to record highs will continue.
Last week there was a significant reaction to the “dot plot” from the meeting of the Fed’s policy-making body, which showed expectations that interest rates could start to rise in 2023, rather than in 2024, and to subsequent comments last Friday by St Louis Fed president James Bullard, that rates may increase as early as 2022.
Markets fell sharply following his comments, with the Dow dropping by more than 500 points, and the S&P 500 recording its worst week in four months. By this Wednesday, Wall Street had returned to previous levels. But this was not due to the operation of so-called “market forces.”
The World Socialist Web Site has no information as to what discussions were held between Fed officials. But from what followed, it appears a decision was taken over the weekend that concerted action needed to be taken, lest the tremor that went through Wall Street turned into something more significant, and some “heavy hitters” were called in.
On Monday, John Williams, the president of the New York Fed, the second most important figure after Powell in the Fed’s governing body, commented that the US economy was not ready for the central bank to start easing its monetary support.
Williams said the economy was “getting better all the time” but insisted the Fed would maintain the new policy framework, adopted last August, in which it said it would allow inflation to rise above its target rate of 2 percent, before considering rate increases or pulling back on asset purchases.
“It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery,” he said.
On Tuesday, in the lead-up to Powell’s testimony to Congress, the president of the San Francisco Fed, Mary Daly, weighed in.
“Talking about rate changes now isn’t even on the table,” she told reporters. “The mantra right now is: ‘steady in the boat’.”
In his opening statement to Congress, Powell insisted the Fed would “do everything we can to support the economy for as long as it takes to complete the recovery” in order to make clear the Fed was not going to react to warnings of inflation by clamping down on the money supply to Wall Street.
Responding to a question from South Carolina House Democrat Representative James Clyburn, Powell said: “We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation. Instead, we will wait for actual evidence of actual inflation or other imbalances.”
Echoing issues raised by Democrat Lawrence Summers, who was Treasury Secretary in the Clinton administration and an economic adviser to Biden, Republican Representative Mark Green, prefacing a question to Powell, said: “When Congress spends trillions of dollars and the Fed prints money, something’s got to give.”
He asked whether price increases in recent months—inflation rose 5 percent year-on-year in May after a 4.2 percent rise in April—were “the start of something that could be as bad as the “70s,” when inflation was more than 10 percent.
Powell replied that such a scenario was “very, very unlikely,” sticking to the mantra of the Fed that recent price rises were “transitory,” a product of the reopening of the economy.
The price rises were “something that we’ll go though over a period. It will then be over. And it should not leave much of a mark on the on-going inflation process,” he said, during his testimony.
Congressional testimony from Fed officials always has a very large fictional component, because they can never state openly that the overriding role of the central bank is to ensure support for finance capital. Consequently, written remarks and responses to questions are couched in terms of support for the economy and serving the interests of the American people.
Powell took these fictions to new levels in his remarks to Congress. Defending the ultra-low interest rate regime, and the determination of the Fed not to make pre-emptive moves, he said the Fed was committed to an “inclusive recovery.”
“There is a growing realisation across the political spectrum that we need to achieve more inclusive prosperity. Real incomes at the lower end of the spectrum have stagnated relative to those at the top. Mobility across income spectrums has declined in the United States and now lags that of most other advanced economies. These things hold us back as an economy and a country,” he said.
But the chief factor in the ever-rising level of social inequality in the US, going back decades, and accelerating in the period of the pandemic, has been the trillions of dollars funnelled into Wall Street, boosting the wealth of the holders of financial assets.
As this week’s Credit Suisse wealth report, pointing to the further enrichment of the ultra-wealthy in the course of the pandemic, noted: “The rise in wealth inequality was likely not caused by the pandemic itself, nor its direct economic impacts, but was instead a consequence of actions undertaken to mitigate its impact, primarily lower interest rates.”
While the public “debate” over Fed policy has focused on inflation, the underlying issue for the ruling classes is not price rises per se, but the question of wages and the suppression of the growing resurgence of the working class, after decades of wage cuts.
In previous times, the Fed would have responded to such a development with a rise in interest rates, to prevent so-called “overheating” in the economy.
But this path is now fraught with danger because, such has been the build-up of debt in the US and global economy to record levels, and the development of rampant speculation financed by borrowed money, that even a small rise in interest rates from their present ultra-low levels could trigger a financial crisis.
Consequently, finance capital and its political representatives in the US and around the world are relying on the trade unions to suppress and betray the emerging struggles of the working class.
In the US, where the Biden administration has launched a historically unprecedented campaign for increased unionisation, the Wall Street Journal has been publishing almost daily comments and articles on the push for higher wages, featuring comments from employers about the need to remove supplementary COVID unemployment benefits, in order to increase the labour supply—that is, force workers to take whatever low-paying job they are offered.
The connection between the policies of the Fed, the state of financial markets and the development of the class struggle, through the push for higher wages, was highlighted in comments to the business channel CNBC by Chris Watling, CEO of the investment consulting firm, Longview Economics, earlier this week.
He said at present the Fed was resolute on sticking the course—“looser for longer, looser than they’ve ever been before—and maintaining that liquidity as much as they can, and being very, very slow to withdraw it.
“Anything that upsets that apple cart, and the labour market is a possible candidate, is a real issue ... for financial markets in the medium term, given the sort of valuation metrics that we have there.”
In other words, the resurgence of the working class could have major consequences for the financial house of cards created by the Fed and other central banks.
This connection makes clear that the role of the trade union bureaucracy, in the US and internationally, in striving to suppress and betray all independent action, is not the product of a few corrupt individuals, but the response to the deepest needs of finance capital.
Small Business Inflation Metrics Hit Highest Since 1981
A record share of small businesses say they are raising prices, data released Tuesday showed.
The National Federation of Independent Business said that the net percent of small businesses that have raised prices rose seven points to 47 percent, the highest seasonally adjusted inflation since 1981.
Five percent reported lower average selling prices, unchanged from a month ago, on an unadjusted basis. Fifty-four percent reported higher average prices, up an unadjusted six points.
Seasonally adjusted, a net 44 percent plan price hikes, up 1 point.
“The incidence of price hikes on Main Street is clearly on the rise as owners pass on rising labor and operating costs to their customers,” the NFIB said in its report. “The Fed will start worrying about inflation as Main Street continues to raise selling prices, pushing the inflation measures up,” the NFIB said.
Finding qualified workers also remains a challenge for businesses.
“Small businesses optimism is rising as the economy opens up, yet a record number of employers continue to report that there are few or no qualified applicants for open positions,” said NFIB Chief Economist Bill Dunkelberg. “Owners are also having a hard time keeping their inventory stocks up with strong sales and supply chain problems.”
Forty-six percent of owners reported job openings that could not be filled, a decrease of two points from May but still historically high and above the 48-historical average of 22%. Small employers have plans to fill open positions, job creation plans over the next three months rose to a net 28%, up one point.
No comments:
Post a Comment