“Price increases have now spread to a broader range of goods and services. Wages have also risen briskly and we are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation.”
So says Jerome Powell, the chair of Federal Reserve Banks at a conference following a decision to hold interest rates at near zero.
“Like most forecasters we continue to expect inflation to decline over the course of the year,” he said, providing no detail beyond previous statements that much of inflation may be due to supply chain issues.
“We are committed to our price stability goal and will use our tools both to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched,” Powell said. “The economy no longer needs sustained high levels of monetary policy support.”
Powell further stated the economic outlook remains highly uncertain, we need to be nimble, will remain attentive to risks, including risks that high inflation is more persistent than expected, that’s in regards to potential decisions that may be taken in March.
“Balance sheet reduction will occur over time in a predictable manner primarily through adjustments to investments so that securities roll out off the balance sheet,” he further said but there is no decisions regarding timing, pace or specific details to reduce the balance sheet.
“I think there’s quite a bit of room to raise interest rates without threatening the labour market,” Powell said.
Powell also argued fiscal policy will be less accommodative this year and a resolution to supply chain issues may reduce inflation and prevent it from becoming entrenched.
Nasdaq has now gone into red, falling by 0.5% after rising above 3% following Powell’s statements. Bitcoin likewise has dropped to $37,300 from briefly just about touching $39,000.
Regarding stock movements, Powell said Fed’s focus is on the broader economy and markets are now pricing in interest raises with the median expectation being three rate raises this year, as well as a reduction of the balance sheet sometime later this year.
Financial conditions are reflecting in advance the decisions we make as it has been communicated in advance, Powell said.