Fed Chair Powell Warns Of ‘Exuberant’ Spending And Price Spikes After Pandemic But Isn’t Worried About Long-Term Inflation

Topline

In an interview Thursday afternoon, Federal Reserve Chairman Jerome Powell warned of short-lived price spikes once the pandemic subsidies but sought to assuage fears of long-term inflation that have dominated bear-market commentary in the new year, insisting the economy is on track for pre-pandemic growth levels and a broad economic recovery by year’s end.

Key Facts

Speaking at his alma-mater Princeton University, Powell said the Fed expects “a strong wave of exuberant spending” that could result in higher-than-usual prices later this year, particularly in industries that have had to reduce or halt their services.

At the same time, he expects inflation should also trend upward as it laps the low readings in the spring of last year, when prices took a hit during heightened pandemic uncertainty.

Still, Powell doesn’t expect any negative inflationary effects will be long-lived or catastrophic: “The dynamics will change, but we don’t think they change quickly or on a dime,” Powell said, noting that there are too many Americans seeking work to worry that wages will increase in a way that facilitates higher inflation.

He also reiterated that the Fed won’t raise interest rates unless it sees troubling inflation well above 2%, saying he doesn’t expect that will happen “anytime soon.” 

“The economy is still horrible,” Powell said, pointing to the cripplingly high unemployment facing low-income households in particular as one sign the Fed won’t change its monetary policy in the near future. 

“Powell probably bought himself a several months of not having to address when they will be ready to discuss the idea of tapering,” Oanda analyst Edward Moya said after the interview, referring to the $120 billion per month the Fed is spending buying securities to inject money into the economy in hopes that helps speed up the recovery.

Crucial Quote 

“If inflation were to move up in ways that are unwelcome, we have the tools for that, and we will use them,” Powell said, referring to the historically low interest rates the Fed can still raise to dissuade borrowing, thereby lowering spending and prices and as a result, slowing inflation. “No one should doubt that–in a way, too low inflation is the much more difficult problem to solve.”

Tangent

The U.S. Consumer Price Index, the most widely used measure of domestic inflation, increased 0.4% in December after rising 0.2% in November, the Bureau of Labor Statistics reported Wednesday. Prices have climbed 1.4% over the past 12 months–fairly below the Federal Reserve’s longtime annual inflation target of 2%.

Key Background

Rapid inflation and abrupt interest rate hikes that “happen quickly and without warning” represent the biggest risk to the U.S. stock market this year, Morgan Stanley equity strategists said in a note last week about the longer-term consequences of massive government spending during the pandemic. “With global GDP output already back to pre-pandemic levels and the economy not yet even close to fully reopened, we think the risk for more acute price spikes is greater than appreciated,” strategist Michael J. Wilson said, noting that bitcoin’s rapid resurgence is one sign markets are already starting to think currencies like the dollar could be in for an unexpected crash that has ripple effects across asset classes.

Further Reading

More Stimulus Could Hurt Stocks–Here’s The Indicator To Watch Before It Does (Forbes)

Here’s The Biggest Risk For The Stock Market This Year, According To Morgan Stanley Experts (Forbes)

Here’s What We Know About Biden’s Massive New Stimulus Plan (Forbes)

‘Elections Have Consequences’: Goldman Sachs Makes 6 Big Predictions For The Economy This Year (Forbes)

Source: https://www.forbes.com/sites/jonathanponciano/2021/01/14/fed-chair-powell-warns-of-exuberant-spending-and-price-spikes-after-pandemic-but-isnt-worried-about-long-term-inflation/