Federal Reserve Chairman Jerome Powell Predicts Recent Price Spikes Will Subside Soon

Federal Reserve Chairman Jerome Powell is predicting recent price spikes will subside soon, as consumer prices rose 5 percent in May compared to a year ago.

Powell made his forecast in written testimony for a congressional oversight hearing Tuesday. He said the price increase in May, the largest in 13 years, appears to be extreme compared to last spring's prices that dropped due to the COVID-19 pandemic.

"As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal," Powell said in his testimony.

However, St. Louis Fed President James Bullard said on Monday inflation "could go higher," than the 2.5 percent rate he has predicted for 2022. Meanwhile, New York Federal Reserve Bank President John Williams said he expects "that as price reversals and short-run imbalances from the economy reopening play out, inflation will come down from around 3% this year to close to 2% next year and in 2023."

Federal Reserve Board Chairman Jerome Powell
Federal Reserve Board Chairman Jerome Powell testifies on the Federal Reserve's response to the coronavirus pandemic during a House Oversight and Reform Select Subcommittee hearing on Capitol Hill in Washington, DC, June 22, 2021. Powell predicts recent price spikes will subside soon. Graeme Jennings/AFP via Getty Images

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Powell's comments come at a time that financial markets are struggling to interpret the Federal Reserve's recent moves. Last week Fed officials signaled that they may increase the central bank's benchmark interest rate twice in 2023, an earlier time frame than they set out in March, when no rate hike was expected until after that year.

Powell also said the Fed had formally begun discussing when and how the central bank might reduce the current $120 billion a month of Treasurys and mortgage-backed bonds that the Fed is purchasing each month. Those purchases are intended to keep longer-term interest rates lower to encourage more borrowing and spending.

Both moves were seen as evidence that the Fed wanted to indicate it was prepared to keep inflation in check without initially taking any steps to pull back on its efforts to stimulate the economy.

But Powell also emphasized at last week's press conference that Fed policymakers were still not even discussing a rate hike, with the economy far from fully healed. And the Fed has said it won't begin actually reducing its bond purchases until the economy has made "substantial further progress" toward its goals of full employment and inflation on track to stay slightly above 2 percent.

"We are a ways away from substantial further progress, we think," Powell said last week. "But we are making progress."

Some Fed officials are not completely convinced that inflation is temporary. Bullard said that the economy is in unprecedented territory, making it hard to know where inflation will go next.

Yet other officials echoed Powell's views on inflation. On Monday, Williams, who also serves as vice chair of the Fed's policymaking committee, said that he expects recent price spikes will prove temporary.

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell, right, testifies before the Senate Banking Committee on Capitol Hill in Washington, Tuesday, Dec. 1, 2020. The economy is growing at a healthy clip, and that has accelerated inflation, Federal Reserve Chair Jerome Powell says in written testimony to be delivered Tuesday, June 22, 2021 at a congressional oversight hearing. Susan Walsh/AP Photo