Federal Reserve Can't Be Sure Inflation Will Ease in 2022, Prices 'Higher' Than Expected

Speaking in front of the House Financial Services Committee on Wednesday, Federal Reserve Chair Jerome Powell expressed increased concerns about price spikes, and said it's impossible to be sure that inflation will slow over the next year, the Associated Press reported.

Powell said that while many economists regard the highest rates of inflation since 1990 as a temporary response by the market to challenges along the supply chain of dozens of products, no one can be certain that prices will improve at predicted rates.

"The point is, we can't act as if we're sure of that," he said. "We're not at all sure of that. Inflation has been more persistent and higher than we've expected."

At the same hearing, Treasury Secretary Janet Yellen defended various spending proposals of the Biden administration. Multiple Republicans on the committee blamed Biden's plans for the high inflation rates, claiming the $2 trillion social and environmental spending bill being debated in Congress would exacerbate the problems.

"It is the multiple trillions of dollars that this Congress and this administration is spending that is putting jet fuel on the fires of this economy," said Representative Patrick McHenry of North Carolina, the senior Republican on the committee. "It is making things worse."

Yellen said the spending that has been passed is designed to take place over the next decade, and would be paid for through other programs, lessening its impact on potential inflation.

She also argued that increasing spending on child care programs could make it easier for women to return to the workforce after having children, which would improve the labor shortage she said is contributing to inflation.

For more reporting from the Associated Press, see below.

Jerome Powell, Janet Yellen, Inflation
Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen listen to lawmakers during a House Committee on Financial Services hearing on Capitol Hill in Washington, D.C., on Wednesday. Powell and Yellen testified to the committee about the current state of the U.S. economy and inflation. Amanda Andrade-Rhoades/Associated Press

As Americans have spent more time at home, they have ramped up spending on furniture, appliances, laptop computers. Soaring demand for such goods, combined with parts shortages, have resulted in supply chain snarls and higher prices.

In the past, Powell, who was nominated last week to a second four-year term by President Joe Biden, has frequently expressed his belief that these supply-and-demand imbalances should fade as the pandemic eases, which would reduce inflation. But on Wednesday, he said that while such an outcome is "likely," it is only a forecast.

Yellen defended the administration's $1.9 trillion financial relief package, approved last March, and said that "at most," it was a "small contributor" to higher prices, which she said were mostly due to supply chain bottlenecks.

The financial relief bill "put money in people's pockets, helped to meet expenses that they had and contributed to strong demand in the U.S. economy," Yellen said.

Powell's latest remarks came a day after he signaled a sharp turn toward tightening credit more quickly than the Fed has previously indicated. The Fed chair said Tuesday that it would be "appropriate" for the central bank to consider accelerating the reduction of its bond purchases at its next meeting in mid-December. That step would pave the way to the Fed hiking its benchmark interest rate as early as next spring.

Stock prices tumbled after Powell's comments. Low interest rates have been a key driver of the stock market to record highs during the pandemic. Shares recovered most of those losses in mid-day trading Wednesday.

Powell also downplayed sharp wage gains this year as something that could boost inflation further, suggesting that he doesn't yet see a wage-price spiral developing. In the 1970s, as prices rose steadily, workers were able to demand higher pay to keep up with greater costs. Yet businesses then raised prices further to cover the higher wages, extending the worst run of inflation since World War II.

"We like to see wages move up," Powell said. "At this point, we don't see them moving up at a troubling rate that would tend to spark higher inflation, but that's something we're watching very carefully."

On Tuesday, Powell said he was ready to "retire" the use of the word "transitory" to describe inflation. Instead, he said the "risk of higher inflation has increased."

Powell also on Tuesday elevated inflation-fighting to a more urgent priority than supporting job growth by noting that higher prices themselves threaten the economic recovery. A long period of growth, he said, is needed to regain the "great labor market" that existed before the pandemic.

Jerome Powell, Janet Yellen, Inflation
Treasury Secretary Janet Yellen and Federal Reserve Board Chairman Jerome Powell testify during a hearing before House Financial Services Committee on Capitol Hill on Wednesday in Washington, D.C. The committee held a hearing on Oversight of the Treasury Department's and Federal Reserve's Pandemic Response. Alex Wong/Getty Images