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Powell: "Tension" between jobs, inflation is the chief challenge facing Fed

EconomySep 29, 2021 09:35PM ET
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© Reuters. FILE PHOTO: Federal Reserve Chairman Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021. Kevin Dietsch/Pool via REUT

By Howard Schneider

(Reuters) -Resolving "tension" between high inflation and still-elevated unemployment is the most urgent issue facing the Federal Reserve right now, Fed Chair Jerome Powell said Wednesday, acknowledging the central bank's two goals are in potential conflict.

"This is not the situation that we have faced for a very long time and it is one in which there is a tension between our two objectives...Inflation is high and well above target and yet there appears to be slack in the labor market," Powell said at a European Central Bank forum, an apparent reference to the 1970s bout of U.S. "stagflation" that combined high unemployment and fast-rising prices.

The United States is more than 5 million jobs short of where it was before the pandemic. At the Fed's most recent meeting policymakers lifted their inflation forecasts for this year to 4.2% - more than twice the targeted level of 2%. They see that pace easing in 2022 to 2.2%, modestly above where they had pegged it in their previous projections in June.

Powell said the Fed's working "hypothesis" is that inflation will largely ease on its own as the global economy returns to normal after a rocky reopening from the pandemic, a baseline that lets the Fed chief refer to interest rate increases as still "a ways off."

But asked about his biggest concerns right now, Powell referred to the possible clash between the Fed's two goals of stable prices and full employment, a situation that could force the Fed to make trade-offs between the two by raising interest rates to tame prices at a time when it still wants to encourage job growth.

"Managing through that over the next couple of years is the highest and most important priority and it is going to be very challenging," Powell said at a virtual event alongside the heads of the ECB, Bank of Japan and Bank of England.

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His comments are among the most direct the Fed chief has made on a topic policymakers have tried to downplay: That current high inflation, if it persists, could force them to begin to tighten monetary policy before they deliver on a promise to reach "maximum employment" and fully heal the job market of its pandemic scars.

Typically the rates of unemployment and inflation are inversely related, partly due to monetary policy and the use of interest rates to either stimulate or depress the demand for goods and services, thus influencing prices and hiring.

That relationship seemed to weaken in recent years, with low inflation existing side by side in the United States with very tight labor markets and low unemployment.

But the global supply shocks delivered by the pandemic has at least temporarily brought back the old dynamics, pushing the availability of goods and services out of kilter with the demand for them.

The issue now is how long that dislocation lasts, and whether inflation proves so persistent that it outruns improvement in the job market and forces the Fed to begin raising interest rates while unemployment is still high.

The risks around inflation have already prompted half of Fed officials to pencil in interest rate increases beginning next year, and while the job market may make marked progress by then Powell in his remarks said the difficulties around the world's economic reopening had become "frustrating."

"It is frustrating to acknowledge that getting people vaccinated and getting Delta under control 18 months later still remains the most important economic policy that we have," Powell said in response to a question on the U.S. economic outlook. "And it's also frustrating to see the bottlenecks and supply chain problems not getting better, in fact at the margin apparently getting a little bit worse."

"We see that continuing into next year probably and holding inflation up longer than we had thought," Powell said. "But ultimately the outlook for next year among my colleagues and me at the Fed for next year is quite a strong year with growth quite above trend and unemployment reaching significantly lower levels than now."

Fed officials at their meeting earlier this month downgraded their views of U.S. gross domestic product growth for this year but upgraded estimates for next year, reflecting expectations that activity for the balance of this year will be stymied by supply issues and those restraints will fade in 2022.

Powell: "Tension" between jobs, inflation is the chief challenge facing Fed
 

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Comments (17)
Sean Kim
Sean Kim Sep 29, 2021 10:39PM ET
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FED has triple mandates,  Stock, Inflation, and job.   And raising the stock price constantly is the first priority
James Andrews
James Andrews Sep 29, 2021 9:36PM ET
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We have to wait until inflation gets so bad these lazy socialists have to go back to work
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 29, 2021 9:06PM ET
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when taper begins more inflation will surely push prices beyond
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 29, 2021 9:04PM ET
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5 million drones are employed. that is full employment. hike rates
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 29, 2021 9:01PM ET
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This guy is so weak. You make them poor, cut their benefits, they will get back to work. Third rate Reagan trickling down takes too long and totally Insane. US has never had a good president since JFK
MK MK
MK MK Sep 29, 2021 5:56PM ET
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Old fool finally noticed inflation :)
Klaus Weyers
Klaus Weyers Sep 29, 2021 5:45PM ET
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the bubble will burst sooner or later.. my short stocks are doing very well.. ty
Sid Iyer
Sid Iyer Sep 29, 2021 5:45PM ET
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When do you expect the bubble to burst? From what I'm seeing, the correction isn't going to be soon enough or imminent enough to warrant a large short position yet...
John Healy
John Healy Sep 29, 2021 5:10PM ET
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Powell: “The committe does not recognize that simultaneously rising inflation and unemployment can coexist, therefore there is no such thing as ‘stagflation’ in accordance with the Keynesian model.” Okay, he really didn’t say that, but that’s essentially what he and Yellen are trying to convey. Just keep throwing money at the supply side and everything will magically work out. Evidently things just aren’t that simple. This thing’s gonna crack.
Juniper Ls
Juniper Ls Sep 29, 2021 3:46PM ET
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Home schooling is on the rise, self-employment is on the rise, seniors are taking early retirement and this guy Powell still thinks it's 2019. He had it wrong then too.
Stefan Kunco
Stefan Kunco Sep 29, 2021 3:20PM ET
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I think grandparents are out of reality
Stefan Kunco
Stefan Kunco Sep 29, 2021 3:20PM ET
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I think grandparents are out of reality
Vincenzo Tilotta
Vincenzo Tilotta Sep 29, 2021 1:26PM ET
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He is just looking for excuses to delay as much as possible, he knows that he cannot taper, any rate lift off is a very distant mirage
Romain Bouis
Romain Bouis Sep 29, 2021 1:26PM ET
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They can't avoid raising rate. High inflation with low rates means people better buy stuff instead of investing which implies more inflation which implies people buying stuff instead of businesses and so on.... You don't want that.
Abdurrahman Peter Lauridsen
Abdurrahman Peter Lauridsen Sep 29, 2021 1:13PM ET
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Fed is the club of criminals
Sol Wein
Sol Wein Sep 29, 2021 1:01PM ET
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You are a lier powell or you are uneducated. How about coming to terms withe the fact that you have been Supplying the market with $120 billion a month and that is what is driving consumer good prices up.
Stefan Kunco
Stefan Kunco Sep 29, 2021 12:53PM ET
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I think the Fed needs ambitious young people, and they're going to retire because they're driving the economy into the dark
Millennial Metals
Millennial Metals Sep 29, 2021 12:49PM ET
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Then quit printing money
Lynn Htal
Lynn Htal Sep 29, 2021 12:47PM ET
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Powell is dangerous man
 
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