Jay Powell to say US price pressures are persisting longer than expected

Elevated price pressures stemming from pandemic-related disruptions are persisting longer than anticipated, Federal Reserve chair Jay Powell will tell US lawmakers at a joint congressional hearing with Treasury secretary Janet Yellen on Tuesday.

In testimony to be delivered to the Senate banking committee at 10am Eastern Time, Powell acknowledged the economy was getting stronger, but warned of the risk that inflation could stay higher for longer than anticipated as the more contagious Delta coronavirus variant further gums up supply chains.

“As reopening continues, bottlenecks, hiring difficulties and other constraints could again prove to be greater and more enduring than anticipated, posing upside risks to inflation,” he said in prepared remarks released on Monday.

“If sustained higher inflation were to become a serious concern, we would certainly respond and use our tools to ensure that inflation runs at levels that are consistent with our goal.”

He added that inflation would remain “elevated” in the coming months before moderating and dropping back towards the central bank’s longstanding 2 per cent goal.

His comments come on the heels of the latest meeting on monetary policy last week, where the Fed signalled it would soon begin reducing, or “tapering”, the $120bn-a-month asset purchase programme it put in place last year and pledged to continue until it saw “substantial further progress” towards inflation averaging 2 per cent and maximum employment.

Fresh projections released last week suggested more Fed officials now believe an interest rate increase could be appropriate next year, with at least three rises pencilled in by the end of 2023.

Yellen, who is also set to testify on Tuesday, added in her own remarks to lawmakers that she was “optimistic” about the “medium-term trajectory” of the economy and expected a return to full employment in 2022.

Nonetheless, she warned of continued risks posed by the Delta variant, which has damped consumer sentiment and curbed business activity.

“We are in the midst of a fragile but rapid recovery from the pandemic-induced recession,” she said. “While our economy continues to expand and recapture a substantial share of the jobs lost during 2020, significant challenges from the Delta variant continue to suppress the speed of the recovery and present substantial barriers to a vibrant economy.”

She also implored lawmakers in Congress to raise the debt limit in order to avert what she said would be a “catastrophic event for [the] economy”, warning not only of a financial crisis and economic recession, but also compromised US creditworthiness.

The warning comes after a bill to raise the US borrowing limit failed to pass the Senate’s 60-vote filibuster threshold on Monday evening, with Republicans in the upper chamber of Congress voting to reject the measure. Democrats, who control the Senate by the slimmest of margins, are now under pressure to raise the borrowing limit on their own and avert a government shutdown ahead of a 12.01am Friday deadline.

Top Fed officials have warned lawmakers of potentially severe consequences if no agreement is reached. On Monday, John Williams, the president of the Federal Reserve Bank of New York, said investors could become “extremely nervous” and think “I’ve got to get out of things”, which he said could lead to an “extreme kind of reaction in markets”.

Federal Reserve governor Lael Brainard on Monday also urged lawmakers to act, saying Congress “needs to step up”, while Powell last week described the possibility of “severe damage” if the US defaulted on its obligations.