Jerome Powell, Chairman of the Board of the US Federal Reserve, testified before a hearing of the Financial Services Commission of the House of Representatives in Washington, DC, USA, June 23, 2022.
Mary F. Calvert Reuters
Federal Reserve Chairman Jerome Powell promised on Wednesday that politicians would not allow inflation to take over the US economy in the long run.
“The risk is that due to the many upheavals, you will start moving to a higher inflation regime. Our job is literally to prevent this and we will prevent this,” the central bank leader said. “We will not allow a transition from a low-inflation environment to a high-inflation environment.
Speaking at a forum of the European Central Bank, along with three of his global counterparts, Powell continued his tough talks on inflation in the United States, which is currently at its highest level in more than 40 years.
In the short term, the Fed has introduced a number of interest rate hikes to try to control the rapid rise in prices. But Powell said it was also important to stop inflation expectations in the long run so that they would not harden and create a self-fulfilling cycle.
“A clock is running here, where inflation has been going on for more than a year,” he said. “It would be bad risk management to simply assume that these long-term inflation expectations will remain anchored indefinitely in the face of sustained high inflation. So we don’t do that. “
Since the Fed began raising interest rates in March, market indicators of inflation expectations have fallen sharply. An indicator for the next five years, which compares inflation-indexed government bonds with standard government bonds, fell from nearly 3.6% at the end of March to 2.73% this week.
However, other studies show that consumers expect prices to continue to rise. One such measure, from the University of Michigan, helped the Fed raise its key interest rate by 0.75 percentage points at its meeting earlier this month.
The Fed is now tasked with lowering those expectations without collapsing the economy. Powell said he was confident it would happen, although he acknowledged the risks ahead.
“We are strongly committed to using our tools to bring inflation down. The way to do this is to slow growth, ideally keep it positive,” he said. “Is there a risk that would go too far? Of course, there is a risk. I would not agree that this is the biggest risk to the economy. The bigger mistake you have to make … would be to fail. restore price stability. “
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