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Federal Reserve Chairman Jerome Powell said Tuesday that high inflation has spread beyond areas of the economy most affected by COVID-19 and may prompt the bank to pull back on stimulus sooner.
In a Tuesday hearing before the Senate Banking Committee, Powell said that stronger economic growth and faster price increases across the U.S. economy could push the Fed to taper its monthly bond purchases at a faster rate than initially planned.
"We're now looking at an economy that's very strong and inflationary pressures that are high," Powell said, flanked by Treasury Secretary Janet Yellen. He added it may be "appropriate to wrap up our purchases a few months earlier" than expected.
Powell said the Federal Open Market Committee, the Fed's interest rate and monetary policy setting panel, will discuss a faster taper at its upcoming Dec. 14-15 meeting.
The Fed has purchased at least $120 billion in Treasury bonds and mortgage-backed securities since March 2020 to help keep borrowing costs low as the U.S. recovered from the coronavirus recession. The bank announced last month it would purchase roughly $70 billion in Treasury bonds and $35 billion in mortgage bonds in November, a reduction of $10 billion and $5 billion, respectively, and continue at a similar rate until the purchases end.
Even so, the Fed has faced growing pressure to accelerate the pace of that taper as consumer and producer prices rise quickly across the economy.
Annual inflation reached its highest rate in 30 years in October, according to the Labor Department. Booming consumer demand and strong U.S. growth has overwhelmed factories, suppliers, shipping companies and retailers across the world for months, raising pressure on prices for many popular goods.
"It still strikes me as just extraordinary that the economy has swung past recovery, we're in a full blown expansion, unemployment is down to 4.6 percent, we have record high asset prices ... houses are just unaffordable for many people, and yet the Fed is going to purchase $35 billion in mortgage backed securities in December alone," said Sen. Pat Toomey (Pa.), the top Republican on the Senate Banking Committee.
While prices for popular consumer goods and automobiles drove inflation earlier this year, food and energy price increases have driven inflation over the summer and autumn - a gut punch for cash-strapped families who struggle to afford basic essentials.
"Generally the higher prices we're seeing are related to the supply and demands, imbalances that can be traced directly back to the pandemic and the reopening of the economy," Powell said Tuesday.
"But it's also the case that price increases have spread much more broadly in the recent few months across the economy, and I think the risk of higher inflation has increased," he continued, adding that high inflation will last "well into next year."
Powell, a wide range of economists and many Democratic lawmakers had warned for months against pulling back on support for the economy until the labor market recovers from the onset of the pandemic. While the U.S. has replaced more than three-fourths of the roughly 21 million jobs lost to the pandemic, millions of Americans who left the workforce last year have yet to return.
Democratic lawmakers and some left-leaning economists have urged the Fed to hold off on a faster taper or a quicker start of interest rate hikes, particularly as the omicron variant of the coronavirus raises new uncertainty for the global economy.
"The Fed cannot pump the brakes on our economic recovery too soon, before workers get a chance to fully rebound - and I mean all workers," said Senate Banking Committee Chairman Sherrod Brown (D-Ohio), citing the lower labor force participation rate for women and a Black unemployment rate nearly twice the October national level.
"Corporations and their allies in this building want you to believe that we have to choose between high wages and low prices. That's a false choice."
Powell said that it could take "longer" for labor force participation to return to pre-pandemic levels as a new variant raises fresh health concerns, though he expressed confidence after a recent stretch of strong monthly job growth. The U.S. added an average of 442,000 jobs between August and October following a gain of more than 1 million jobs in July.
"Labor force participation is a lagging indicator, it follows big improvements in the unemployment rate, and we're probably on track to have that happen," Powell said. But he added that persistently higher inflation could pose its own risk to a full job market recovery.
"To get back to the kind of great labor market we had before the pandemic, we're going to need a long expansion. To get that, we're going to need price stability. And in a sense, the risk of persistent high inflation is also a major risk to getting back to such a labor market," Powell said.
Powell's Tuesday appearance is his first before Congress since President Biden nominated him last week for another four-year term chairing the Fed. While Powell is expected to be easily confirmed again, the depth of his Republican support could rest on the Fed's handling of inflation.
While Republicans expressed concerns about inflation to Powell, they've also slammed the Biden administration for the recent surge in prices. GOP lawmakers have blamed Biden's $1.9 trillion March stimulus bill, the cancellation of the Keystone pipeline and vaccination requirements for high inflation, though many other countries have also experienced sharp price increases.
Yellen pitched Biden's Build Back Better plan - the massive climate and social services bill passed last week by the House - as a long-term way to lower household expenses. She argued that the bill's investments in child care, education affordability, lowering prescription drug prices and expanding housing would curb years of rising prices in those sectors without adding much, if anything, to the national debt thanks to accompanying tax hikes.
"These are some of the most burdensome items in family budgets, ones that have risen more rapidly than the general level of prices over time, and the bill will help families meet those make those burdensome expenditures," Yellen said.
Even so, experts say those investments could take years to lower prices.