Powell Says Worsening Supply Side Constraints Raise Inflation Risks

Federal Reserve Chairman Jerome Powell acknowledged Friday worsening supply side constraints on the economy and the risk of higher inflation.

“The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation,” Powell said during a virtual conference

Powell also appeared to indicate that the Fed will formally announce a gradual reduction of its monthly purchases of Treasury and mortgage debt at the conclusion of its two day meeting on November 3 meeting.  Fed watchers think the central bank will begin shrinking those purchases by around $15 billion a month. At that pace, it would take until June for the Fed to stop adding bonds to its balance sheet.

“I do think it’s time to taper and I don’t think it’s time to raise rates,” Powell said.

Powell has emphasized in the past that the end of bond purchases would not necessarily or immediately lead into rate hikes. But the futures market currently implies that there is an 83.7 percent chance of at least one rate hike by the September meeting and a 47.1 percent chance of two or more. Indeed, the futures market-implied odds favor a rate hike as early as the July meeting.

The Fed chair said the bank would remain flexible in assessing policy in light of economic data.

“I would say our policy is well-positioned to manage a range of plausible outcomes,” Powell said.

Powell also said that the Fed is cognizant of how “painful” inflation is for consumers. He said he expects some inflationary pressures to ease as the labor market “heals” but that if inflation persists at a higher rate than expected the Fed will intervene.

“No one should doubt that we will use our tools to guide inflation back down to two percent,” Powell said.