Federal Reserve Chair Jerome Powell said on Wednesday that the US central bank must be prepared to respond if inflation does not fall in the second half of next year as most forecasters currently expect.
Powell reiterated in his second day of congressional testimony that he and fellow policymakers will consider a faster wind-down of the Fed's bond-buying program at their upcoming meeting, a move widely seen as opening the door to earlier interest rate hikes.
With extremely strong consumer demand colliding with persistent supply chain issues, the Fed may be approaching the point where it must choose between pursuing full employment and keeping inflation under control.
Powell stated on Tuesday that he believes inflation will fall "significantly" in the second half of next year as supply chains are repaired, but that "the risks of higher inflation have increased."
"We have to use our policy to address the range of plausible outcomes, not just the most likely one," he told the Financial Services Committee of the United States House of Representatives.
As if to amplify those concerns, a Federal Reserve survey released on Wednesday revealed that businesses across the country are increasingly grappling with higher prices and scrambling to fill jobs due to labor shortages, even though they are able to pass on higher costs to customers in many cases with little resistance. According to the Fed's Beige Book, an anecdotal survey of businesses in the Fed's 12 districts, "nearly all Districts reported robust wage growth."
Soon after Powell testified before Congress alongside Treasury Secretary Janet Yellen, public health officials announced the first known case in the United States of a patient infected with the Omicron COVID-19 variant, which is thought to be more infectious than previous strains of the coronavirus.
Though lawmakers did not question Powell on how the new variant might affect the economy or the Fed's policy response, New York Fed President John Williams told the New York Times in an interview published Wednesday that it could both slow economic activity and exacerbate inflationary pressures.
This daunting combination could exacerbate the difficulties Fed policymakers face in calibrating their response to the good news of a strengthening economy, the bad news of a possible new COVID-19 surge, and inflation that is persisting longer and remaining higher than expected.
Last month, the Fed started reducing its monthly purchases of Treasuries and mortgage-backed securities from $120 billion to a pace that would put it on track to end purchases by mid-2022. The program was launched in early 2020 to help the economy recover from the pandemic.
Powell stated again on Tuesday that policymakers would discuss whether to end the program a few months earlier due to the strength of the economy at their meeting on December 14-15.
Powell stated that the United States' recovery is stronger than that of other major economies, owing in part to more robust fiscal support. Consumer spending in the United States increased in October, and first-time applications for unemployment benefits hit a 52-year low, prompting economists to raise their GDP growth forecasts for the fourth quarter.
Nonetheless, consumer confidence fell to a nine-month low in November, owing to concerns about rising living costs and pandemic fatigue. Households and businesses are also experiencing increased uncertainty as a result of the Omicron variant.
Powell stated that Fed officials are keeping an eye on the changing economic landscape and acknowledged that they may face "tension" as they pursue the US central bank's dual mandate of maximum employment and price stability.
"When those two goals are in conflict, as they are right now," Powell said. "However, I assure you that we will use our tools to ensure that the current high inflation does not become entrenched."
Powell stated that wages have been rising, particularly for low-wage workers, and that the Fed is keeping a close eye on the trend.
"We've seen significant wage growth," Powell said. "We don't see them moving up at a troubling rate that would tend to spark higher inflation, but we're keeping a close eye on it."