Powell says Fed may raise rates sharply to beat inflation

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Powell says Fed may raise rates sharply to beat inflation

Rising oil and gas prices and other commodity disruptions linked to the war in Ukraine could propel prices already up, spelling trouble for consumer inflation expectations. Expectations can be self-fulfilling if buyers and businesses anticipate inflation year after year and act accordingly.

“There is an increasing risk that extended periods of high inflation could push long-term expectations uncomfortably high,” Mr. Powell said.

Still, he said the job market was already very strong, which could help the economy cope with the period with a more restrictive policy.

“By many measures, the labor market is extremely tight, much tighter than the very strong job market just before the pandemic,” Mr. Powell said. “A record number of people are leaving every month, usually to take on another job with a higher salary.”

Fed officials are hoping that workers — who are in short supply — will return to the job market in the coming months and years, helping to ease pressure from employers. If it does, it could help slow inflation as wage growth softens.

“In a sense, it’s a great labor market,” Mr. Powell said – but not sustainable. He noted that “this is a labor market that is out of equilibrium, in which there is actually an excess of demand over supply.”

Employees have gone back more slowly than forecasters expected, either because they retired early or because pandemic-related issues such as a lack of care are keeping them at home. Similarly, supply chain problems, such as factory closures and shipping snares, have been slow to fix, partly due to repeated coronavirus outbreaks.

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“It seems likely that the expected supply-side healing will come over time as the world eventually settles into some new normal, but the timing and scope of that relief remains extremely uncertain,” Mr. Powell said. “In the meantime, as we set policy, we will seek genuine progress on these issues and will not consider significant near-term supply-side relief.”

Talman Joseph Smith Contributed to reporting.

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