Powell says US economy can withstand monetary tightening and rise in omicron cases

By Howard Schneider and Ann Saphir

Jan 11 (Reuters) – The Federal Reserve’s plans to tighten monetary policy this year should not weaken strong employment in an economy that «no longer needs or wants» the massive stimulus the US central bank has provided, he said. Fed Chairman Jerome Powell on Tuesday.

In his testimony before the Senate Banking Committee, Powell stated that he expected the country to overcome the current increase in coronavirus cases, with a «temporary» impact on the economy and probably without thwarting plans to raise interest rates and reduce your asset holdings this year.

Powell assured lawmakers, who appeared to be leaning toward backing him for a second four-year term, that inflation is now the Fed’s primary focus as price increases are on a 40-year high and well above the target for the Fed. 2% from the Fed.

In fact, he told the Democrat-controlled panel that prices needed to stabilize to keep economic expansion and job growth going.

«Inflation is well above target. The economy no longer needs or wants the very expansionary policies we’ve had,» Powell said. But «it is a long way» for monetary policy to return to normal, and although it was time to end emergency measures due to the pandemic, that «should not have negative effects on the labor market.»

Inflation was the focus of lawmakers’ attention during the hearing, and Powell said he still felt that while the level of price increases required the Fed to act, some relief would come beyond monetary policy as the Global supply chains will start to catch up with demand.

Wrongly expecting the tightening to happen quickly, he said, is why the Fed initially deemed the rise in inflation last year «transitory,» only to see it continue to rise.

He said he now believes inflation will subside by the middle of this year, but that the Fed is ready to do whatever it takes to prevent high rates of price increases from «taking hold.»

«We’re going to have to be humble but skillful,» he said, in deciding when and how quickly to raise interest rates and change asset holdings, which have soared to more than $ 8 trillion. Powell said no decision has been made on monetary policy normalization, but the Fed is likely to decide to cut the balance sheet «earlier and faster» than after the 2007-09 recession.

INTEREST RATES

The hearing is a first step in the long-awaited confirmation of Powell by the full Senate for a new four-year term as Fed chairman. Lael Brainard, current Fed governor, will be questioned by the same panel on Thursday for a four-year term as vice president.

In December, the Federal Reserve decided to end its purchases of Treasury bonds and mortgage-backed securities by March – a legacy of its nearly two-year battle against the economic fallout of the pandemic – and said it could raise rates. of interest three times this year.

Since then, COVID-19 infections have reached record daily figures, with increased hospitalizations and employee quarantine undermining an already stretched labor supply, with some observers expecting it to escalate. even more the mismatch between supply and demand that is pushing up prices.

Investors and traders will be on the lookout for new clues as to when the Federal Reserve could start raising its interest rates and possibly reducing its bond holdings to curb inflation.

Financial markets anticipate an aggressive response and interest rate futures traders are betting on four hikes this year.

(Reporting by Howard Schneider; Edited in Spanish by Ricardo Figueroa and Manuel Farías)