Jerome Powell says Fed must ‘make policy in real time’ to curb sky-high inflation

“With inflation as high as it is, we have to make policy in real time,” Fed Chair Jerome Powell said Wednesday. The price of consumer goods and services rose 6.8% over the last 12 months, well above the Fed’s 2% target. 

To combat inflation, the Fed announced Wednesday it plans to significantly pull back its large-scale bond-buying program faster than it initially forecast, clearing the way for at least three interest rate hikes next year. But higher interest rates can hurt employment, particularly in sectors more sensitive to interest shifts. If mortgage and auto loan rates jump, for example, homebuilders and carmakers may not hire as much or as fast if homes and cars become more expensive. And the Fed has to balance its dual mandate of achieving maximum employment as well as stable prices.

“We don’t have a strong labor force participation recovery yet, and we may not have it for some time. At the same time, we have to make policy now, and inflation is well above target. So this is something we need to take into account,” Powell said. 

Why not stop purchasing entirely right away? Powell said Wednesday that the Fed has learned that it’s best to take a methodical approach to making adjustments. “Markets can be sensitive to it. We’re basically two meetings away now from finishing the taper, and we thought that was the appropriate way to go.”

By moving faster to phase out its bond buying by March, the Fed is giving itself more wiggle room to raise interest rates in order to tamp down rising consumer prices. Throughout the pandemic, the Fed has kept interest rates near zero to help boost economic recovery, but it indicated Wednesday that it may be soon time to change that. Higher interest rates typically slow the economy and decrease inflation. 

“We are phasing out our purchases more rapidly because with elevated inflation pressures in a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support,” Powell said Wednesday. 

The inflation trends have shifted in recent months, something Powell noted Wednesday. Last spring, higher inflation looked to be temporary, with a limited number of factors like supply-chain bottlenecks and worker shortages contributing to it. But in September, Powell said the picture started to change, and price increases were no longer transitory. 

Going forward, Powell says there’s a lot of uncertainty regarding how the ongoing COVID-19 pandemic, and in particular the rising Omicron variant, will affect the economy, consumer demand, supply chains, or hiring.

But Powell said he feels the U.S. is “well positioned” to deal with inflation, as well as react to the range of plausible outcomes that can come as a result of the pandemic and current economic conditions. “The data that we got toward the end of the fall was a really strong signal that inflation was more persistent and higher. And I think we’re reacting to that now,” he said. 

Powell also pushed back on criticism that the Fed waited too long to make adjustments. “I wouldn’t look at it [like] we’re behind the curve. I would look at it that we’re actually in position now to take the steps that we’ll need to take, in a thoughtful manner, to address quality issues, including that of too high inflation.”