Jerome Powell brushed off inflation concerns Tuesday, saying that while the economy might see some upward pressure on prices this year, the Federal Reserve does not anticipate inflation to boom or stick around.
The Fed chairman testified before the House Financial Services Committee alongside Treasury Secretary Janet Yellen, their first joint appearance since President Biden took office. Powell’s virtual presence on Capitol Hill came less than a week after the Fed announced it will keep its interest rates near zero.
During the hearing, Rep. Patrick McHenry raised concerns about the effect spending has on inflation and highlighted the $1.9 trillion COVID-19 spending package punched through Congress. The North Carolina Republican also pointed out the Biden administration’s reported plans for an even bigger spending package, one that could top $3 trillion.
The federal government estimates that it will end up spending about $1 trillion in 2021 because of the spending package that has already passed. The deficit was projected to exceed $2.2 trillion before the bill passed. The Biden administration has yet to announce the scale of a second package, although it may be accompanied by historic federal tax hikes.
2021 COULD SEE STRONG ECONOMY COUPLED WITH EMERGENCY MONETARY AND FISCAL POLICIES
Powell told lawmakers that the Fed is “strongly committed” to both its price stability mandate (inflation that averages 2% over time) and its maximum employment mandate and said that while inflation may temporarily increase, he expects it will bounce back down.
The Fed chief said that as the economy continues to reopen and vaccinations continue, “there could be a surge in spending and there could be some bottlenecks in the economy” and “we might see some upward pressure on prices.”
“Our best view is that the effect on inflation will be neither particularly large nor persistent,” the chairman said, adding that the world has experienced disinflationary pressures for the last 25 years. “We don’t think that a one-time surge in spending leading to temporary price increases would disrupt that.”
The Fed’s policy report last week projected inflation would balloon to 2.4% by year’s end before falling back down to 2% in 2022.
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Concerns about inflation aside, the Fed is predicting an increasingly optimistic 2021. Last week, it forecast 6.5% gross domestic product growth for the year and unemployment falling to 4.5% before the year ends. If GDP increases at the scale of the Fed’s prediction, it would be the strongest annual growth since Ronald Reagan was president.
