Powell defends Fed's inflation stance as GOP lawmakers cast doubt

Federal Reserve Chairman Jerome Powell on Thursday defended the U.S. central bank's decision to keep in place the ultra-easy policy measures implemented last year during the COVID-19 pandemic, even as inflation surges to the highest level in 13 years.

Returning to Capitol Hill for a second day of testimony on the economy and monetary policy, Powell – speaking before the Senate Banking Committee – faced scrutiny and skepticism from some Republican lawmakers that the recent burst in consumer prices is fleeting. 

"This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course we’re not comfortable with that," Powell told lawmakers.

SURGING INFLATION COULD DERAIL ECONOMIC RECOVERY FROM PANDEMIC, IMF WARNS

Powell has repeatedly blamed pandemic-driven bottlenecks in the supply chain and pent-up consumer demand for the rapid increase in the price of goods and services. The government reported on Tuesday that inflation rose at the fastest pace since 2008 in June, with consumer prices jumping 0.9% from May and 5.4% over the past year.  

The Fed chair called the price spike "unique," and reiterated the central bank is closely monitoring to see whether the inflation dissipates, or whether it proves to be longer-lasting.

"The challenge we’re confronting is how to react to this inflation, which is larger than we had expected – or that anybody had expected," Powell said. "And to the extent it is temporary, it wouldn’t be appropriate to react to it. But to the extent it gets longer and longer, we’ll have to reevaluate the risks."

CONSUMER PRICES SURGE 5% ANNUALLY, MOST SINCE AUGUST 2008

But he drew criticism from Republican lawmakers for the Fed's continued support of the economy, with Sen. Pat Toomey, the ranking member on the Senate Banking Committee, questioning why the central bank had not begun unwinding some of its policies.

"The Fed’s policy is especially troubling because the warning siren for problematic inflation is getting louder," Toomey, R-Pa., said. "Inflation is here, and it’s more severe than most – including the Fed itself – expected."

Powell has stressed that the economy is still "a ways off" from where it needs to be in order for policymakers to begin paring the Fed's purchases of $120 billion a month in bonds, a policy known as "quantitative easing" that's designed to keep credit cheap. The Fed also slashed interest rates to near zero in March 2020; economic projections released by the central bank in June show that most officials expect to keep rates at the current range of 0% to 0.25% until 2023.

In his prepared remarks, Powell said that labor market conditions are improving but that there is "still a long way to go" and that achieving "substantial further progress" toward the Fed's economic goals is a "ways off."

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Markets have been closing watching Powell for signs the central bank is ready to start scaling back the massive monthly bond purchases. Powell told reporters during the post-meeting press conference that officials had started "talking about talking about" tapering, and minutes from the June meeting showed that officials discussed how and when to begin pumping the brakes.

Wall Street widely expects the Fed to provide more insight into the timing of tapering when central bankers gather in August at their annual retreat in Jackson Hole, Wyoming.