Jerome Powell Renews Fed’s Inflation Forecast Ahead of House Panel Testimony

Federal Reserve Chairman Jerome Powell has finally acknowledged that inflation has indeed picked up significantly, but insisted that any underlying price pressures will subside back to the central bank’s target rate of 2% once supply shortages resolve.

In a series of written remarks Powell prepared ahead of his testimony before the House Select Subcommittee on the Coronavirus Crisis slated for Tuesday, the Chairman has admitted that “inflation has increased notably in recent months,” citing a jump in the price of oil as well as a surge in consumer spending. However, according to Powell, “as these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.”

Powell’s latest remarks coincide with his comments at a June 16 press conference, following the conclusion of the monthly FOMC meeting. Financial markets have recently been grappling with the FOMC’s latest “dot plot” print, which suggests that the interest rate forecast has been revised upwards, as 11 of the 18 members projected not one but two rate hikes before the end of 2023. In addition, seven of those officials predicted a borrowing cost spike as early as 2022.

The Fed’s inflation forecasts had an immediate impact on financial markets and investors alike, as short term-rates spiked and long-term yields became flattened. Although Powell did acknowledge that “the economy has shown sustained improvement” with job gains slated to gain momentum in coming months, he continues to insist that inflation is still just transitory.

Conversely, Former Treasury Secretary Steven Mnuchin appears to have a confounding view on the surge in price pressures. In a recent interview with Bloomberg Television, Mnuchin said that inflation will likely push the Fed to revise its monetary policy in the coming years or even months, which markets and investors may not necessary be prepared for.

“There’s no question the Fed needs to go into a period of normalizing rates and normalizing the portfolio” of bond holdings, Mnuchin said. According to the former Treasury Secretary, the recent surge in inflation will likely persist, contrary to Powell’s insistence otherwise.

Mnuchin added that the Fed is relying on economic models that are unable to absorb the copious amounts of monetary and fiscal policy stimulus that is responsible for price fluctuations. “I think this is something that needs to be watched very carefully and I do think the markets are underestimating this risk.”

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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