Fed speaks of unprecedented inflation phenomenon

The surge in inflation associated with the reopening of the US economy […] has evidently caught the Fed off guard.

At a hearing in the US Senate on Thursday, Fed Chair Jerome Powell admitted that this historically “unique” inflation had turned out higher than the Fed “or anyone” had expected. Unlike in earlier economic cycles, it is not accompanied by an overheating labour market.

Rather, with the reopening “a shock has gone through the system” and driven inflation far above the Fed’s two per cent target: “Of course we are not relaxed about this.” Consumer prices had risen surprisingly strongly in June, by 5.4 per cent year on year, fuelling speculation about an early interest rate turnaround.

As long as inflation proves to be temporary, a reaction to it would be out of the question, Powell stressed. But if, contrary to expectations, it should drag on for longer, the risks would have to be reassessed – especially with regard to inflation expectations. The Fed is supporting the economy with its monetary policy. This will remain so for “quite some time”, even if the central bank eventually scales back its bond purchases and even after an interest rate rise.

© apa / afp / Pool / Graeme Jennings

Source: Wiener Zeitung, 15 July 2021 (no longer available online)