Job Strength May Cause Inflation to Linger, Says Fed Chair

With a better-than-expected jobs report in early February, inflation may “take quite a bit of time” to level off, U.S. Federal Reserve Chairman Jerome Powell said at the Economic Club of Washington, according to Reuters.

Economic strength from 517,000 added jobs may threaten the Fed’s progress in lowering inflation, since interest rates may have to move higher. Powell wouldn’t say if the benchmark interest rate would exceed the 5% to 5.25% range that is expected, which would mean a .25% increases at each of the Fed’s next two meetings.

Policymakers were open to shocks in either direction, Powell said. They’d approve tighter monetary policies if job gains continue to be strong, leading to higher wages and prices. Or, they’d be open to the notion that inflation may slow, even with a robust jobs landscape.

The current 3.4% unemployment rate is a 53-year-low and may exceed "maximum employment." It likely would need to rise for inflation to return to the Fed's 2% target, Powell said.

However, Powell acknowledges that, due to the unprecedented COVID-19 global pandemic and the resultant shocks to the economy, “this cycle is different from other cycles . . . It has just confounded all sorts of attempts to predict.” Powell noted that wage growth has slowed even with continued strong job gains.

Despite the strong jobs report, Powell said he thought a process of "disinflation" was underway, with the Fed now watching how quickly it spreads to service industries where inflation has taken longer to subside.