Fed Chair Says Inflation To Hang Around a Bit Longer; New Beige Book Data Show Why

WASHINGTON–The chairman of the Federal Reserve told the House the current increase in inflation is temporary, although it will remain elevated in the months ahead before moderating.

Fed Chairman Jay Powell’s comments before Congress came on the same day the Fed released its Beige Book analysis, which found an economy showing increasing strength, but also suffering shortages of many materials and manpower.

During his testimony before House Financial Services Committee as part of his semiannual monetary policy report to Congress, which he will repeat today before the Senate, Powell said asset valuations have generally risen as the economy has improved and investor risk appetite has grown.

“Household balance sheets are, on average, quite strong, business leverage has been declining from high levels, and the institutions at the core of the financial system remain resilient,” Powell said.

What About Inflation?

As for inflation, which is of concern to many Americans who have faced rapidly rising prices, Powell agreed it has “increased notably” and will likely remain elevated in the months ahead before moderating.

“Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” Powell testified. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”

Powell further said the Federal Open Market Committee (FOMC) is seeking longer-term inflation expectations that are “well anchored at 2%” to avoid long periods of low or high inflation. 

“Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC’s longer-run inflation goal,” he said.

Powell offered no forecast directly related to the future direction of rates.

Beige Book Data

Meanwhile, the Fed’s newest Beige book data indicate what most everyone recognizes, which is the U.S. economy is recovering quickly, but the recovery is being restrained by widespread shortages of labor and supplies.

While the economy has made lots of progress, Powell indicated during his testimony that it stills needs a lot of support from the Fed. As evidence, he  pointed to the millions of people still being out of work.

“The U.S. economy strengthened further from late May to early July, displaying moderate to robust growth,” the Beige Book said. 

The biggest problem for the economy right now is the inability of businesses to keep up with the crush of demand, according to the Beige Book analysis. “Supply-side disruptions became more widespread, including shortages of materials and labor, delivery delays, and low inventories of many consumer goods,” the survey said.

The Beige Book pointed to strong demand for a variety of goods and services, including new and used cars, travel and tourism. Most industries were also growing rapidly.

The July Beige Book covered the period from late May to July 2. 

Unlikely to Ease Off Throttle

“The Beige Book mirrored Chairman Powell’s comments before Congress of a growing belief that inflationary pressures may last longer than once believed,” said NAFCU’s chief economist and VP of research, Curt Long. “Ongoing shortages in labor and materials are frustrating hopes that the economy would quickly return to normal. However, with the labor market still far from full employment, the Fed is unlikely to ease off the throttle.”