Powell Says Supply-Side Constraints Are Creating More Inflation Risk

Federal Reserve Chairman Jerome Powell, testifying at a Senate committee hearing in September, said ‘supply-side constraints have gotten worse.’

Photo: Kevin Dietsch – Pool via CNP/Zuma Press

Federal Reserve Chairman Jerome Powell indicated he is somewhat more concerned about higher inflation and said that the central bank would watch carefully for signs that households and businesses are expecting sustained price pressures to continue.

“Supply-side constraints have gotten worse,” Mr. Powell said Friday at a virtual conference.

While the Fed has anticipated that price pressures would abate as the pandemic subsides, he said it would be important for the central bank to stay flexible in the months ahead.

The central bank will “need to make sure that our policy is positioned for a range of possible outcomes,” he said.

Rising vaccination rates and the nearly $2.8 trillion in federal spending approved since December 2020 have produced a recovery like none in recent memory. Inflation has soared this year, with “core prices” that exclude volatile food and energy categories, the Fed’s preferred gauge, up 3.6% in August from a year earlier. The gains largely reflect disrupted supply chains and shortages of labor and materials.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next.

Mr. Powell and his colleagues have strongly signaled that the Fed would formally announce a gradual reduction, or tapering, of its monthly purchases of $120 billion in Treasury and mortgage debt at its Nov. 2-3 meeting. Officials at their September meeting discussed a plan that would reduce those purchases by $15 billion a month, meaning they would conclude the asset-purchase program by next June.

That schedule for phasing out the Fed’s stimulus program is faster than investors had anticipated just a few months ago. It partly reflects how this year’s surge in inflation is lasting longer than central-bank officials and private-sector economists anticipated.

Officials don’t want to be in a position where they feel compelled to raise rates at a time when they are still fueling monetary stimulus by purchasing assets.

Inflation data and a surge in energy prices since September point to some broadening in price pressures, and other central banks have signaled plans to raise rates more aggressively. That has fueled recent bond-market expectations of somewhat earlier and faster rate rises by the Fed.

Write to Nick Timiraos at nick.timiraos@wsj.com

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