Federal Reserve Chairman Jerome Powell said on Friday the U.S. continues to recover from the pandemic recession, and that progress could allow the central bank to dial back its extraordinary efforts to prop up the economy later this year.
Powell cautioned, however, that the recovery remains uneven and unpredictable, and said the Fed will continue to monitor incoming data and adjust its policies as needed.
The Fed chairman addressed an annual economic conference that's usually held in Jackson Hole, Wyo. A spike in coronavirus cases forced organizers to move the meeting online a week ago, highlighting the uncertainty that forecasters have had to reckon with throughout the pandemic.
"Labor market conditions are improving but turbulent," Powell said. "And the pandemic continues to threaten not only health and life but also economic activity."
Powell's speech comes as he and other policymakers are trying to decide when the Fed should start to phase out its aggressive bond-buying program.
The central bank has been buying at least $120 billion worth of Treasury and mortgage-backed securities every month in an effort to prop up the economy by keeping borrowing costs low.
At their last meeting in July, policymakers said the job market was not yet strong enough to slow those purchases, but most thought it could be later this year.
In his speech, Powell reaffirmed that timetable without providing specifics but said policymakers will continue to monitor evolving risks.
Investors seemed to welcome the Fed chairman's cautious approach. Stock indexes rose during the speech, with the Dow Jones Industrial Average up more than 200 points midmorning.
The labor market is roaring back ...
Employers have been on a hiring spree, adding nearly 1.9 million jobs in June and July. But the U.S. has yet to replace about 25% of the jobs lost in the early months of the pandemic. And millions of people who left the workforce during that period have yet to return, prompting employers to complain about a labor shortage.
Many forecasters hope to see a jump in job applicants this fall as children go back to school and supplemental unemployment benefits run out across the country. But the surge in coronavirus infections tied to the delta variant has put that optimistic outlook in doubt.
"While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment," Powell said.
... But so is inflation
The strong job market the U.S. was enjoying before the coronavirus struck had widespread benefits — especially for workers on the lower rungs of the income ladder — and the Fed is eager to see a return to that. Powell and his colleagues have said they're willing to tolerate somewhat higher inflation to encourage full employment.
But policymakers have been surprised at how much prices have jumped in recent months.
The consumer price index rose 5.4% in the 12 months ending in July, matching the June inflation rate that was the highest in nearly 13 years.
A separate inflation measure, which the Fed closely follows, was 4.2% for the 12 months ending in July, up from 4% a month earlier.
Fed officials surveyed in June said they expected that separate measure to drop to 3.4% by the end of this year and to 2.1% in 2022.
Both the central bank and the Biden administration believe much of the recent runup in prices has been driven by temporary factors. Those include pent-up demand from consumers who had limited opportunities for travel and in-person entertainment last winter and supply-chain bottlenecks that have resulted in shortages of everything from two-by-fours to iPads.
"Inflation at these levels is, of course, a cause for concern," Powell said. But he reiterated his view that prices should level off as demand cools and shortages get worked out.
"Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments, and it is sometimes difficult to do so with confidence in real time," Powell said. He stressed that if it becomes necessary, the Fed will use its tools to keep inflation in check.
Many economists agree that inflation is unlikely to spiral out of control as it did in the 1970s. But others caution that even a "temporary" spike in inflation may last longer than is comfortable.
"Our sense is that supply-chain bottlenecks [and] the pressure on labor are going to make inflation a little bit more persistent than what the Fed has been counting on," Wells Fargo economist Mark Vitner said this week.
Powell's term leading the central bank is set to expire in February. Some progressive lawmakers want President Biden to replace Powell, but Bloomberg reported last week that Treasury Secretary Janet Yellen believes the Fed chairman deserves a second term.
Yellen was Fed chair until then-President Donald Trump tapped Powell to replace her.
MARY LOUISE KELLY, HOST:
Throughout the pandemic, the Federal Reserve has been pumping large amounts of money into the economy in hopes of cushioning the downturn and maybe speeding up the recovery. Fed Chairman Jerome Powell said today that if employers continue to hire at a steady clip, the central bank may start to scale back that support later this year. The Fed's actions have been a boon for the stock market, but they are controversial in some circles at a time of rising inflation. NPR's Scott Horsley is here to enlighten us.
SCOTT HORSLEY, BYLINE: Good afternoon.
KELLY: So tell me more about what exactly Jerome Powell is saying about how long this pretty aggressive attempt to prop up the economy might last.
HORSLEY: It's going to last at least a little while longer. The Fed's been buying large amounts of Treasury and mortgage-backed bonds. And Powell and other policymakers want to see further improvement in the job market before they start to dial back those purchases. Employers have been on a hiring spree. They added almost 1.9 million jobs in June and July. But there are still a lot of workers on the sidelines, and Powell hopes to see more people looking for and finding jobs in the months to come.
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JEROME POWELL: With vaccinations rising, schools reopening and enhanced unemployment benefits ending, some factors that may be holding back job-seekers are likely fading. While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.
HORSLEY: And if that happens, Powell says, the Fed could start to slow its bond buying sometime this fall or winter. But he did not spell out a precise timetable.
KELLY: And why not? What's the downside to just being a little more specific about timing here?
HORSLEY: Well, there's still just a lot of uncertainty. You know, this pandemic recession has been really unusual, and every time policymakers think they have it figured out, along comes a curveball. Just to give you one example, Powell was supposed to deliver this speech today at an economic conference in Jackson Hole, Wyo., but just a week ago, that meeting was abruptly moved online because of a surge in new coronavirus infections. And that just underscores what a wild card the delta variant has been for anyone trying to predict the future. Powell says the Fed is going to keep a close eye on all the economic dials and be ready to adjust its policies as necessary.
Wall Street was listening particularly closely to the speech today, and investors seemed to like what they heard. All the major stock indexes rose as the Fed chairman was speaking, and the Nasdaq and S&P 500 closed at record highs.
KELLY: Well, we've been talking about getting people into jobs, and obviously, that's one of the Fed's goals. I want to ask about another, which is stable prices because right now, as you've been reporting, prices are climbing a lot faster than the Fed would like. How worried is Powell about that?
HORSLEY: He's not terribly worried, but he's not indifferent either. Just this morning, the Commerce Department reported on its inflation yardstick, which is the one the Fed pays the most attention to. It showed prices in July were 4.2% higher than a year ago. That's more than double the Fed's long-term inflation target of 2%. Powell acknowledges that's worth keeping an eye on, but he says it's not something to panic about.
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POWELL: Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.
HORSLEY: Some of the things that were driving inflation in recent months, like the price of used cars, has started to level off. What's more, price hikes in July were smaller than they had been in May and June. Powell says the Fed's going to continue to keep a close eye on inflation and be ready to clamp down if necessary, which usually would mean raising interest rates. But he doesn't want to do that prematurely. He says it could be really harmful, especially at a time when there are still millions of people out of work.
KELLY: Thank you, Scott.
HORSLEY: You're welcome.
KELLY: NPR's Scott Horsley.
(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.