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    Powell faces Senate questions about the Fed’s plans to contain inflation

    Federal Reserve Chair Jerome Powell is expected to win the second term, leading the central bank, but confirmed the Senate on Tuesday after recently pivoting to strengthen policies to combat inflation. You need to face the grill at the hearing.

    When annual inflation began to exceed 4% last summer, Powell told legislators that it would be a mistake to raise interest rates in response to temporary rises in certain prices, such as air travel and used cars. Told. Soaring due to the bumpy resumption of the US economy.

    Along Federal Reserve Board Policy Meeting in DecemberAfter months of rising inflation, Powell and his colleagues raised rates by three-quarters this year. And last week, they signaled that they could start moving in March.

    Andrew Olmem, Deputy Director of the White House, undoubtedly Powell’s final confirmation, but at the hearing, members of the Senate Banking Commission were asked why the Fed changed course and to curb inflation. He asked me to explain the plan.National Economic Council under the former Republican President

    Donald Trump..

    “This nomination hearing is one of the most complex times in the Fed’s history these days, and while there is still considerable uncertainty about the future course and economy of the pandemic, significant policy shifts are underway. It’s inside, “said Olmem. Former Senator and now a partner of the law firm Mayer Brown.

    Of the 84 members who voted to confirm Republican Powell, 68 were still in office four years ago and are evenly divided into two-party caucuses. When President Biden supported Mr Powell, several members of both parties expressed their support. Announced his reappointment In November, it includes top Democrats and Republicans of the Commission, Senator Sherrod Brown (Ohio D.) and Pat Toomey (Pennsylvania R.).

    Powell led a colleague at a meeting last month to end the bond-buying stimulus package in March, opening the door to raising interest rates. Last week, they dropped a hint that from that point on, they might start shrinking their asset portfolio sooner. This will be another form of tightening policy.

    Powell has been trying to balance the two risks over the past year. That is, the risk of raising interest rates prematurely, the risk of long-term unemployment rises, or the risk of keeping them at very low levels, establishing higher inflation and forcing them to make quicker adjustments later.

    The Federal Reserve says it will accelerate the shrinking of its bond-buying program, the biggest step the central bank has taken to reverse the stimulus of the pandemic era. Here’s how the taper works and why it drives the market to the edge. Photo Illustration: Adele Morgan / WSJ

    Authorities warned last year of overreacting to temporary price increases due to higher interest rates and a cold labor market if supply chain bottlenecks are a major factor in inflation and are expected to reverse over time. I did.

    If inflation remains too high or begins to permeate consumer and corporate expectations of future inflation, it could be self-fulfilling and the Fed will change course, he said. “It may be time for the risk to reverse,” Powell said.

    Risks reversed in the fall as demand was stronger than expected and there was more evidence that it could fuel broader and more sustainable price pressures, even if the peculiar rise due to supply problems later reversed.

    “I believe that inflation is now likely to be more sustainable and the risk of higher inflation taking hold is higher,” Powell said in a press conference last month.

    Powell said in a prepared testimony for Tuesday’s hearing released on Monday that central banks would use the tool “to prevent higher inflation from taking hold.”

    Authorities are now signaling that they do not want to underreact when wages rise. This can foster a more traditional inflation cycle. They say that aggressive fiscal and monetary policy responses to pandemics over the past two years could change the dynamics of traditional recessions and boost wage growth, which normally takes a long time to recover after a recession. We are focusing on the outlook.

    The sharp rise in home prices, stocks and other assets has boosted the wealth of many Americans, fueled stronger demand, allowed some to retire faster than expected, and tightened the labor market. increase. Demand could rise further as the pandemic subsides, spending on services increases, and more Americans look for jobs.

    “We see that the post-pandemic economy is likely to differ in several ways. To pursue our goals, we need to take these differences into account,” Powell said on Monday. I mentioned in. Monetary policy needs to “keep pace with the evolving economy and take a broad and positive view.”

    President Biden’s political property may be related to Mr. Powell’s reaction. If the Federal Reserve is too low or too slow, Americans will face higher inflation over the years, or central banks will be forced to aggressively raise interest rates, disrupting financial markets and disrupting the economy. You may fall into a recession. If you move too fast or too fast, you run the risk of getting hired faster and slower.

    Inflation in the last few decades has reached its highest level in decades due to strong demand for commodities, supply chain disruptions and various shortages. Core consumer prices, excluding the volatile food and energy categories, rose 4.7% year-on-year in November, according to the Federal Reserve’s recommended gauge. This is well above the Fed’s 2% target.

    But in recent weeks, it’s not just high inflation readings, but labor market trends that have shifted the Fed’s policy tightening much faster than it saw last summer.

    The unemployment rate, which fell to 3.9% in December, is lower than it was four years before Powell took office as Fed chair. Despite the turmoil caused by the pandemic that caused unemployment to 14.7%, the post-WWII record of April 2020.

    Barclays chief US economist Michael Gappen believes inflation could fall again this year, not because the Fed put more money into the economy, but because it believes there was a price increase primarily due to a pandemic. He said he thinks. “The main reason for high inflation is the pandemic story of relative demand and bottlenecks. Policy stance is secondary,” he said.

    Others are concerned that rising house prices and rents will maintain inflation well above the Fed’s targets this year. Kenneth Rosen, residential economist at the University of California, Berkeley, said:

    As most forecasters and federal officials expect, if inflation doesn’t fall this year, potentially difficult questions are looming. “If inflation continues, how high will interest rates have to be to reverse it?” Said Adam Posen, director of the Peterson Institute for International Economics.

    At last week’s economic conference, some economists on either side of the aisle said the Fed has been waiting too long for a rate hike, especially after Congressional Democrats and the White House passed a $ 1.9 trillion fiscal stimulus last March. I warned that it might have happened. Covid-19 Relief Bill..

    Glenn Hubbard, senior economic adviser, said designing a so-called soft landing, where the Fed slows the job market enough to cool inflation, but not enough to cause a recession, “the Fed is lucky and wise. There must be. ” Former Republican President George W. Bush.

    Posen said the Fed was right to ignite last year, despite the potentially difficult balancing efforts. “I still think they can put it under control without causing a major recession. I don’t mind having an overshoot,” he said.

    Write in Nick Timiraos at nick.timiraos@wsj.com

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    Powell faces Senate questions about the Fed’s plans to contain inflation

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