By Howard Schneider
WASHINGTON (Reuters) - It wasn't volunteered, but Federal Reserve Chair Jerome Powell on Tuesday made his most extensive comments to date on the role corporate profits could play in lowering inflation, telling U.S. lawmakers it was possible for inflation to fall and workers' wages to keep rising for a time if companies and their shareholders took less for themselves.
"If corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain" growth in workers' benefits "even as we get inflation down to the target of 2%?" Democratic Senator Chris Van Hollen asked Powell during the Fed chief's semi-annual testimony before the U.S. Senate Banking Committee.
While that might be difficult in the long run, "over the shorter term though, yes," Powell said, dipping tentatively into a debate that may become more pointed over time depending on how inflation, the job market and the economy evolve.
President Joe Biden's administration, now in its third year and eyeing a reelection bid in 2024, is intensifying its focus on corporate behavior and hoping more of the spoils of the economy can be diverted to workers - the thrust of Van Hollen's question. Republicans, including several senators at Tuesday's hearing, have offered a competing narrative focused on overregulation and government spending as sources of the rapid price increases that took root in 2021.
The Fed has been raising interest rates for a year to try to slow inflation that had been running at 40-year highs, and generally has attributed the outbreak to a series of pandemic and other shocks - gummed up global supply, raging demand fueled by pandemic-era payments, and commodity prices driven higher by Russia's invasion of Ukraine.
But in recent months, and as a core assessment of how the economy still needs to adjust, Powell and others have focused on the fact that wages continue to rise at what they see as an unsustainable pace that could make inflation more persistent.
"Wages affect prices and prices affect wages," Powell said, associating current earnings growth to the current ultra-low unemployment rate of 3.4%, and suggesting the labor market may need to weaken at least somewhat for inflation to fall.
As a group, though, Fed officials have been generally hesitant to single out corporate profits, which grew fast during the pandemic and hit a record $3 trillion annualized level in the second quarter of 2022 before falling to around $2.9 trillion in the July-September period.
One exception was former Fed Vice Chair Lael Brainard, who last fall began highlighting how corporate margins in some parts of the economy had outrun input costs, and could help lower inflation with a return to pre-pandemic norms.
She recently left the Fed to become head of Biden's National Economic Council.
SHORTAGES
Ultimately, Powell said he felt profits would likely moderate on their own as the U.S. economy moves beyond the pandemic.
"What we're seeing in the economy is pretty much about shortages ... supply chain blockages," Powell said. "As the supply chains get fixed and shortages are alleviated, you will see ... inflation, coming down, you'll see margins coming down."
But in the meantime - in the political "short-term" - the Fed's attention to wages and the tight labor market has drawn criticism from those who feel it is missing one side of the story.
"Understandably, the Fed can't force corporations to change their ways, or rewrite the Wall Street business model on its own," said Senate Banking Committee Chair Sherrod Brown, a Democrat. "But the Fed can talk about it."