Fed Predicts Inflation Rates Will Decline After Seeing Biggest Increase in 30 Years

Current high inflation rates in the U.S. are likely to dissipate in the next year, Federal Reserve Chair Jerome Powell said Thursday, adding that the Fed will continue to push for full employment regardless.

Powell said before the House Financial Services Committee that he believes inflation, which hit a 30-year high in July, will decline without higher rates from the Fed, the Associated Press reported.

Concerns from Republicans on the committee included inflation—prices soared 4.2 in July compared to the previous year, according to the Fed's preferred gauge.

Powell responded that current inflation "is a function of supply side bottlenecks over which we have no control. But I would say that we do expect in the first half of next year to see some relief, depending on the bottleneck in question, and inflation should move down."

For more reporting from the Associated Press, see below.

Jerome Powell
Federal Reserve Chairman Jerome Powell (right) and Treasury Secretary Janet Yellen testify during a House Financial Services Committee hearing, on Thursday on Capitol Hill in Washington, D.C. Al Drago/AP

Powell spoke earlier this week about "tension" between the Fed's two goals of maximum employment and keeping prices stable. In periods of high unemployment, inflation is typically low, and vice versa. But right now inflation has jumped above the Fed's 2 percent target while the unemployment rate remains elevated, at 5.2 percent.

That can complicate the Fed's mission, because keeping its benchmark short-term interest rate low—it is currently pegged near zero—can help boost hiring, but it could also allow inflation to worsen.

The Fed chair also said that "we are far away from full employment, so that gives us an incentive" to keep interest rates low. Lower rates can encourage more borrowing and spending by consumers and businesses and ultimately lift hiring. Last week, Fed officials projected that their first interest hike won't come until late next year.

Powell has also said that if there were indications that inflation could rise to unsustainable levels, the Fed would hike rates to bring it under control.

"We just have to balance the two," Powell said Thursday. "But I would say our expectation is that inflation will come down and we won't ultimately face that difficult trade-off of having the two goals in tension."

In response to a question from Representative Joyce Beatty, a Democrat from Ohio, Powell pledged to take diversity into account as the Fed replaces two presidents of regional banks who retired on Monday after financial trades they made last year came under sharp scrutiny.

"I can absolutely guarantee you that we will work hard...to find and give a fair shot to diverse candidates for both of those jobs," Powell said.