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As Biden Prepares to Tout Economy, Fed Chair Powell Takes a Cautious Tone


WASHINGTON — Jerome H. Powell, the chair of the Federal Reserve, underscored that the central bank has more work to do with regards to slowing the economy and that officials remain determined to wrestle rapid inflation under control, even when meaning pushing rates higher than expected.

Mr. Powell, speaking on Tuesday in a question-and-answer session on the Economic Club of Washington, D.C., called a recent slowdown in price increases “the very early stages of disinflation.” He added that the means of getting inflation back to normal was more likely to be bumpy.

“There was an expectation that it’ll go away quickly and painlessly — and I don’t think that’s in any respect guaranteed; that’s not the bottom case,” Mr. Powell said. “The bottom case for me is that it’ll take a while, and we’ll should do more rate increases, after which we’ll have to go searching and see whether we’ve done enough.”

The Fed chair’s comments got here hours before President Biden is about to deliver his first State of the Union address and offered some contrast in tone.

Democrats are embracing a historically strong economy with super-low unemployment and rapid wage growth, cheering a report last week that showed employers added greater than half one million jobs in January. But Fed officials have met the news with more caution. The central bank is speculated to foster each full employment and stable inflation, and policymakers have been concerned that the strength of today’s job market could make it harder for them to return wage and price increases to historically normal levels.

Mr. Powell said that the Fed had not expected the roles report back to be so strong, and that the robustness reinforced why the means of lowering inflation “takes a major time frame.”

While he said it was good that the disinflation to this point had not come on the expense of the labor market, he also underscored that further rate of interest moves could be appropriate and that borrowing costs would wish to stay high for a while. And he embraced how markets have adjusted within the wake of the strong hiring numbers: Investors had previously expected the Fed to stop adjusting policy very soon, but now see rate increases in each March and May.

“We anticipate that ongoing rate increases might be appropriate,” Mr. Powell said. He said that within the wake of the roles report, financial conditions were “more well aligned” with that view than they’d been previously.

To attempt to slow the economy and choke off inflation, policymakers raised rates of interest from near zero early last 12 months to greater than 4.5 percent at their last meeting, the quickest pace of adjustment in many years. Higher borrowing costs weigh on demand by making it costlier to fund big purchases or business expansions. That in turn tempers hiring and wage growth, with further cools the economy.

Inflation F.A.Q.

Card 1 of 5

What’s inflation? Inflation is a loss of buying power over time, meaning your dollar won’t go as far tomorrow because it did today. It is often expressed because the annual change in prices for on a regular basis goods and services comparable to food, furniture, apparel, transportation and toys.

What causes inflation? It could be the results of rising consumer demand. But inflation can even rise and fall based on developments which have little to do with economic conditions, comparable to limited oil production and provide chain problems.

Is inflation bad? It will depend on the circumstances. Fast price increases spell trouble, but moderate price gains can result in higher wages and job growth.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets generally have historically fared badly during inflation booms, while tangible assets like houses have held their value higher.

Mr. Powell had hinted during a news conference last week that the Fed was discussing a few more rate increases and will do more if needed. He also underlined that the central bank would go away rates of interest high for a while. But those comments got here before the discharge of a blockbuster January employment report.

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Still, Mr. Powell appeared to reinforce that basic plan on Tuesday, and said that if inflation remained high or the job market stayed strong, “it may perhaps be the case” that the Fed would should raise rates greater than markets currently expected. Stock indexes initially jumped as Mr. Powell spoke, then plummeted, after which jumped again as investors tried to parse his remarks.

“Powell leveraged the employment report back to lend credibility to the hawkish elements of the February message,” Krishna Guha, head of the worldwide policy and central bank strategy team at Evercore ISI, wrote in response to the speech. Hawkish means tilted toward higher rates of interest.

But he “was removed from max hawkish,” Mr. Guha continued, explaining why investors were relieved after the speech.

Still, Mr. Powell called getting inflation back down “the largest challenge” facing the Fed, and noted that within the services sector of the economy — which incorporates industries comparable to restaurants, travel and health care — “we’re not seeing disinflation yet.”

Fed officials aim for two percent inflation on average over time. Their preferred inflation measure stays much higher than that, at 5 percent, though that’s down from a peak of about 7 percent last summer.

Central bankers are quick to acknowledge that the present bout of inflation has not been primarily the results of a robust labor market and climbing wages; it has stemmed from supply chain issues that caused shortages and collided with strong demand fueled partly by government stimulus.

But some worry that a booming economy could keep inflation unusually elevated.

Fed officials have at times said pay gains — which have moderated somewhat but are still climbing around 5.1 percent on a yearly basis in a single closely watched quarterly measure, and by 4.4 percent in monthly numbers — would probably must slow to a spread of three to three.5 percent to line up with their inflation goal.

If corporations are paying more, they’re more likely to charge more to attempt to cover their costs. And as consumers earn more, they could have the ability to maintain spending despite climbing prices.

Some politicians and economists have embraced the recent slowdown in inflation and wage growth as an indication that the Fed might pull off a “soft landing”: cooling the economy enough to drive price increases lower without throwing people out of labor.

But Fed officials have been more cautious about whether roaring labor conditions and moderating inflation can proceed together indefinitely. Typical economic models suggest that it might be difficult for wages and costs to decelerate fully in a labor market this tight.

“The underlying strength of the services sector of the economy continues to be very robust, and that’s where I believe a whole lot of us are focusing our attention,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in an interview on CNBC on Tuesday.

Policymakers are intent on returning inflation quickly and firmly to their goal, because they’re nervous that a protracted period of rapid price increases could change business and employee behavior in ways in which make quick inflation a more everlasting feature of the U.S. economy.

Many economists consider that the Fed’s halting response to inflation allowed that sort of entrenchment to occur within the Nineteen Seventies, which meant that when the Fed did respond decisively within the Nineteen Eighties, it needed to inflict serious pain on the economy to bring inflation under control.

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