According to the Chairman of the Fed, Jerome Powell, the US economy is at risk from inflation, which could seriously jeopardize the recovery.
Inflation according to Powell
“The higher prices seen today are generally related to the pandemic, but some price increases are also being seen more broadly and the risk of higher inflation has increased”.
Powell said Tuesday in a CNBC speech.
“Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy”,
Powell later reiterated during a hearing before the Senate Banking Committee.
“But it’s also the case that price increases have spread much more broadly … and I think the risk of higher inflation has increased”.
The US inflation debate
According to some experts, these statements would be inappropriate, to say the least, because these days we are seeing a general decline in all commodities, as David Rosenberg, chief economist and strategist at Rosenberg Research & Associates, points out in a tweet.
Iron ore is down 60%, lumber is down 50%, steel prices are down 25%, soybeans are down 25%, corn is down 20%, oil is down 20%, base metals are down 12% and Powell decides today is the day to join the consensus inflation bandwagon. Great timing!
— David Rosenberg (@EconguyRosie) November 30, 2021
Indeed, there is much debate about how long inflationary risks will actually last.
According to ECB President Christine Lagarde, the rise in prices would be temporary and should not cause too much concern.
The Omicron variant
However, according to Powell, who in September seemed much less concerned about rising prices, the new variant of the Omicron virus could be game-changing.
“The recent rise in Covid-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation”,
Powell said during Tuesday’s Senate hearing.
“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply-chain disruptions”,
Asked specifically whether he thinks inflation can still be described as transitory, Powell made it clear he no longer believes in such an assumption:
“It is probably a good time to retire that word, and explain more clearly what we mean”,
He said he believes high inflation will persist until at least the middle of next year, and it is therefore “likely” that the US central bank will discuss accelerating the tapering of its asset purchase programme.
Markets seem to have reacted badly to these words, thinking of an imminent tightening of the Fed’s securities purchase programme.
According to some analysts, Powell’s remarks were also prompted by the fact that his nomination for President must be ratified by the US Senate, where a section of Biden’s party would not have looked favourably on Biden’s reappointment as Fed chief.