Federal Reserve Chair Jerome Powell said it was unclear whether the global pressures that kept price increases slow and steady for years before the pandemic would ever return — and he underlined that it was critical for the central bank to stabilize prices in a new and more disrupted world.
“We’ve lived through a period of disinflationary forces around the world,” Powell said Wednesday, speaking on a panel alongside the heads of the European Central Bank and the Bank of England. “Since the pandemic, we’ve been living in a world where the economy is being driven by very different forces, and we know that. What we don’t know is whether we will be going back to something that looks more like, or a little bit like, what we had before.”
He added, “We suspect that it will be kind of a blend.”
The Fed chair said that the central bank’s job was to find price stability and maximum employment in the new economic situation.
Inflation is high across many developed economies, bolstered by rapidly climbing gas prices, high food costs, and supply chain issues that started early in the pandemic and have cascaded since. Some of the inflation the United States is experiencing is driven by strong underlying domestic demand — apartment rents are increasing sharply, hotel room rates are way up, and a variety of services have grown more expensive. But those shared global problems are also causing a big portion of recent price increases.
As inflation runs at the fastest pace in four decades in the United States, Fed policymakers have been raising interest rates quickly to try to wrangle it back under control, lifting their main policy rate by a quarter point in March, half a point in May and three-quarters of a point in June. Central bankers have indicated that they want to raise rates well above 3 percent, compared with their current 1.5 percent-1.75 percent range, by the end of the year.
“The aim of that is to slow growth down so that supply can have a chance to catch up,” Powell said Wednesday. “It’s a necessary adjustment that needs to happen.”
Powell acknowledged that slowing the economy to try to control inflation is “highly likely to involve some pain.” But he noted that “the worse pain would be from failing to address this high inflation and allowing it to become persistent.”
The Fed is trying to cool off the job market and slow consumer and business spending, hoping to bring demand into balance with constrained supply, which would help to tame prices.
The job market is unusually hot right now, which has been helping to push up wages. Unemployment has dropped rapidly from double-digit levels in 2020 to 3.6 percent, near its lowest level in half a century, and there are now nearly two job openings for every applicant in the United States. Fed officials have been hoping that given that underlying strength, they might be able to slow conditions substantially without tipping the economy into a full-on recession.
But central bankers, including Powell, have emphasized that achieving that optimistic outcome has become more challenging.
“We don’t have precision tools,” Powell acknowledged Wednesday, adding that “the events of the last few months have made it significantly more challenging, thinking there particularly of the war in Ukraine, which has added tremendously to inflationary pressures” in commodities.
“It’s gotten harder, the pathways have gotten narrower,” Powell said of a so-called soft landing. “Nevertheless that is our aim.”
While some economists have warned that inflation could slow faster than expected and the Fed might unnecessarily hurt the labor market and broader economy in its quest to cool it down, Powell said that the bigger risk is that consumers and businesses will come to expect higher prices, making it harder to bring prices back under control.
“Is there a risk that we would go too far? Certainly there’s a risk,” Powell said. “But I wouldn’t agree that it’s the biggest risk to the economy. The bigger mistake to make would be to fail to restore price stability.”
The Fed chair acknowledged that it is difficult to understand what is happening with prices at a moment when big hits to supply — like goods shortages and the war in Ukraine’s effect on fuel and food — are driving so much of the situation.
And after a year in which economists have been repeatedly surprised by how long those shocks have lasted, he expressed humility about policymakers’ ability to understand what might come next.
“We now understand better how little we understand about inflation,” Powell said.