Exclusive: According to Powell, the Fed will limit exceeding the inflation target

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© Reuters. FILE PHOTO: Senate Banking Committee hearing on Capitol Hill in Washington

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By Ann Saphir

(Reuters) – The US economy is set to experience “slightly higher” inflation temporarily this year as the recovery deepens and supply shortages drive prices higher in some sectors. However, the Federal Reserve is determined to limit overshoot, Fed Chairman Jerome Powell said in an April 8 letter to Senator Rick Scott.

“We don’t aim for inflation significantly above 2 percent, nor do we aim for inflation above 2 percent for an extended period of time,” Powell said in a five-page response to a March 24 letter written by the Republican from Florida The US Federal Reserve’s bond-buying program raised concerns about rising inflation.

These modifiers – which are “significantly” above 2% inflation or above this level over a “longer” period – help to sharpen the upper limits of the Fed’s comfort zone when prices rise.

“However, I would like to emphasize that we are fully committed to both areas of our dual mandate – maximum employment and stable prices,” said Powell.

The Fed cut its policy rate to near zero overnight in March last year after the coronavirus pandemic hit the United States and pledged to keep borrowing costs unchanged until the economy hits full employment and inflation hits 2% and on the way is too “moderate”. exceed this value for some time.

The central bank also buys $ 120 billion worth of government bonds and mortgage-backed securities every month to keep interest rates at levels that support attitudes and spending, and has promised to do so until “significant further progress” is made. towards full employment and 2% flexible inflation target.

Most Fed policymakers don’t expect them to meet these goals for a few more years.

“Our future policies will be based on actual progress toward our goals,” Powell told Scott, underscoring one point the Fed chief has made a lot over the past few months – that the central bank is not raising interest rates on the basis of forecasts will increase, as was the case with six years ago. Many analysts now view the 2015 spike in rate hikes as a political mistake that unnecessarily slows recovery from the financial crisis less than a decade ago.

“If progress towards our employment and inflation targets slows, we will maintain an extremely accommodative attitude longer,” Powell wrote in the letter. “Conversely, if progress is found to be faster, policy adjustments are likely to come sooner.”

While Scott was not a member of the Senate Banking Committee, which directly oversees the Fed, he was a vocal critic of Powell. The Senator, seen as a potential White House contender in 2024, has warned that the Fed’s low interest rate and bond purchase program will drive prices up and harm families and businesses.

“The data is clear that inflation is rising and Chairman Powell continues to ignore this growing problem,” Scott’s office told Reuters in an email delivered by Powell’s letter. “Senator Scott remains concerned about the impact of inflation on American low- and fixed-income families as he grows up. He urges Chairman Powell to face this threat, develop a clear plan to combat rising inflation, and the Americans protect families. “

In response, Powell said that high inflation is unlikely and that low inflation harms American businesses and households, and limits the Fed’s ability to offset economic shocks through simple monetary policy.

“We have the tools”

After a decade in which inflation has been too low, the Fed is now aiming for inflation to be moderately above 2%.

“We understand the lessons of the high inflationary experience of the 1960s and 1970s and the pressures that experience placed on all Americans,” Powell said in his letter. “We don’t anticipate such inflationary pressures, but we have the means to deal with those pressures if they arise.”

Powell also tried to allay concerns that Scott expressed in his letter last month that the Fed’s bond purchases would trigger “an unprecedented amount of deficit spending and Congressional borrowing.”

Under former President Donald Trump last year and under President Joe Biden this year, Congress granted unprecedented $ 6 trillion in aid to help Americans deal with the pandemic. The relief was largely funded through government debt.

The central bank’s bond purchase, Powell said, was aimed at simplifying the financial position and keeping the markets functioning. He is unrelated to the size of the budget deficit and adds that the Fed is not buying bonds directly from the government.

Fed policymakers are expected to stick to super-easy monetary policy at a meeting next week, even as the economy picks up and rising COVID-19 vaccinations likely bring a return to more normal life in the United States in the year Enable 2021.

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