Fed's Powell faces rate-hike questions on Capitol Hill amid recent inflation surge

Federal Reserve Chairman Jerome Powell is slated to tell lawmakers Tuesday on Capitol Hill that while inflation has risen "noticeably" in recent months, the U.S. economy has shown "sustained improvement" from the coronavirus pandemic. 

Powell, in prepared testimony for the Select Subcommittee on the Coronavirus Crisis, will reiterate to lawmakers that an uptick in consumer prices is due in part to a rebound in spending as the economy reopens. 

"As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal," Powell will say. 

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The Fed head also painted a brighter economic outlook, citing widespread vaccinations and unprecedented levels of monetary and policy support. Still, he will warn that risks remain, including the slowing pace of vaccinations and new strains of COVID-19. 

"We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery," he will say.

Powell's testimony will come less than one week after policymakers at the U.S. central bank said they were prepared to raise interest rates sooner than expected amid a recent inflation surge. Lawmakers will likely question Powell about the Fed's unanimous decision last week to hold interest rates at a range near zero and continue purchasing $120 billion in bonds each month, a policy designed to keep credit cheap. 

CONSUMER PRICES SURGE 5% ANNUALLY, MOST SINCE AUGUST 2008

Although Fed officials reaffirmed their support for these policies, they also began suggesting that they were preparing to take small steps toward eventually tapering the aggressive bond-buying program that began in March 2020 amid signs of a rapidly strengthening economic recovery and surging inflation.

"I expect that we'll be able to say more about timing as we see more data, basically," Powell told reporters last week. "There's not a lot more light I can shed on that." He said the Fed would give markets plenty of advance notice before it begins to withdraw the support that began last year.

Updated economic projections from the meeting show that policymakers raised headline inflation expectations to 3.4% for 2021 – a full point higher than the March forecast. They also moved forward their timeline for hiking interest rates: Officials expect to raise rates twice, to about 0.6%, by late 2023, sooner than they anticipated in March. 

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At the time, the median official did not expect to move rates until 2024. Now, 13 of the 18 Fed officials at the meeting said they expect to start lifting rates sometime in 2023, while seven of the policymakers penciled in a rate hike as early as 2022.