Fed Chair Expects Supply Chain Woes Well Into 2022
By Jeanna Smialek and Matthew Phillips
The pandemic-related shortages pushing consumer prices higher are poised to last longer than economists and policymakers expected, Jerome Powell, the Federal Reserve chair, said on Friday — adding that while officials still expect the rate of inflation to moderate, the central bank is positioning itself to react if it does not.
Supply chain snarls that have slowed deliveries and swelled prices throughout 2021 are “likely to last longer than previously expected, likely well into next year,” Powell said at a virtual conference held by the Bank for International Settlements-South African Reserve Bank. The same is true for upward pressure on wages, he said.
In recent months, the measure of inflation that the Fed focuses on has shown prices increasing 4% or more from a year earlier. The “most likely case” is still that inflation will move back down toward the central bank’s goal of 2% as supply chain kinks clear up and job gains improve, resolving short-term labor shortages and allowing employers to stop bidding up pay, Powell said.
But he signaled that the Fed was closely watching consumer and business expectations to ensure that people did not begin to anticipate persistently higher prices, something that could prompt them to demand higher wages and lock in longer-lasting inflation. His remarks, arguably his most cautious yet on the burst in inflation, were in line with comments by several of his colleagues in recent days, and came as a gauge of investor price predictions that economic policymakers have been monitoring carefully began to jump.
“The risk is that ongoing high inflation will begin to lead price and wage setters to expect unduly high rates of inflation in the future,” Powell said. And if inflation seemed likely to stay high, “we would certainly use our tools to preserve price stability, while also taking into account the implications of our maximum employment goal.”
Until recently, signals from the bond market — where inflation is a key consideration — had indicated little worry among investors that price gains from the reopening of the economy would turn into the kind of structural inflation that dominated the economy during the 1970s.
But there are signs that bond investors are beginning to worry that the long-lasting nature of the supply shocks could lead to price gains that last. The pace of price gains that investors expect is still nowhere near as high as it was in the 1970s, but the trend is notable.
“The longer that those issues continue, the less likely that it is that we get a near-term rollover in inflation,” said Michael Pond, a market analyst who specializes in inflation-protected bonds at Barclays.
On Friday, one measure of the bond market’s expectations for average annual inflation over the next five years, known as a “breakeven,” rose to a record high, briefly topping 3%. Measures of longer-run inflation expectations also rose to multiyear highs.
Given the vast uncertainty about what will happen next, the Fed needs to be ready to adapt, Powell said. To that end, he noted that the central bank was “on track” to begin a slowdown of its large-scale bond-buying purchases, a process that is expected to be completed by the middle of next year.
Powell said that he was weighing the incomplete recovery from the pandemic on one hand and inflation pressures on the other, and that striking the right balance was critical.
When it comes to the service sector, “we want to give full time for it to come back before we start restraining demand with interest rate increases,” Powell said. At the same time, he said, inflation affects people in “groceries, and gas purchases, and things like that — we see that, we know how painful that is.”