At a virtual news conference Wednesday afternoon, U.S. Fed Chairman Jerome Powell said inflation has come in "above expectations" over the last few months, but over time, it seems likely that these specific things that are driving up inflation "will be temporary."
Powell's remarks came days after the U.S. Labor Department reported that the so-called core consumer price index, which excludes the volatile food and energy categories, rose 0.7 percent in May, with a 12-month increase of 3.8 percent, the largest 12-month increase since the period ending June 1992.
Noting that the central bank is going to be looking at the monthly pricing data, Powell said, "We will see increases in supply over coming months, as the factors that we believe have been suppressing supply abate, wane, move down."
With inflation having run persistently below the 2-percent longer-run goal, the Federal Open Market Committee (FOMC) will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent, the Fed said in a statement after concluding its two-day policy meeting.
The Committee decided to keep the target range for the federal funds rate at 0 to 0.25 percent, and keep its monthly pace of asset purchases unchanged "until substantial further progress" has been made toward the Committee's maximum employment and price stability goals.
"As widely expected, the FOMC made no substantive policy changes at today's meeting," Jay Bryson, chief economist at Wells Fargo Securities, said in an analysis, while noting that the FOMC raised its inflation forecast "considerably" for 2021, and most members see the risks to inflation as "skewed to the upside."
Median forecast among Fed officials calls for a 3.4-percent inflation by the end of this year, 1 percentage point up from the March projection, according to the Fed's latest Summary of Economic Projections released Wednesday.
Core personal consumption expenditures price index, the Fed's preferred inflation measure, is expected to rise to 3 percent by end of 2021, up 0.8 percentage point from March projection, and well above the Fed's 2 percent long-term goal.
The central bank also pledged to continue its asset purchase program at least at the current pace of 120 billion U.S. dollars per month, which is in line with expectations. Currently, the Fed is increasing its holdings of Treasury securities by 80 billion dollars per month and of agency mortgage-backed securities by 40 billion dollars per month.
Economists and analysts had predicted that Fed officials could begin debate on tapering the monthly asset purchases as soon as this week's policy meeting. At the news conference, Powell was reluctant to send out clear signals on the timeline to taper its bond buying program.
"At coming meetings, the committee will continue to assess the economy's progress toward our goals and will give advance notice before announcing any decision," Powell told reporters, adding that the timing will depend on the pace of that progress, and not on any calendar.
Diane Swonk, chief economist at Grant Thornton, a major accounting firm, said in a blog that Powell admitted that the Fed is now "actively discussing" a tapering of asset purchases.
"We expect Powell to focus on tapering at his keynote address for the Federal Reserve Bank of Kansas City's Jackson Hole, Wyoming annual conference," Swonk said. "We expect tapering to begin by year-end and to be completed before the Fed raises rates in 2023."
Bernard Yaros, an assistant director and economist at Moody's Analytics, said his team expects the Fed to announce its tapering plans in September and the 15-billion-dollar reduction to occur at each FOMC meeting in 2022.
Yaros also noted that 13 of 18 Fed officials see the first rate hike occurring by the end of 2023, compared with seven in March.
At the press conference, Powell played down the significance of the dot-plot projections. "These are of course individual projections, not a committee forecast. They are not a plan," said the Fed chair, denying any discussion of liftoff in a particular year.
The Fed chief noted that rate increases are not the focus of the committee. "The focus of the committee is the current state of the economy, but in terms of our tools, it's about asset purchases," he said.
"Liftoff is well into the future, the conditions for liftoff are far from maximum employment for example, it is a consideration for the future," he continued.
Powell cited four factors that seem likely to be holding back labor supply: finding a new job, which is a process that takes longer as workers match their skills to what the employer wants; fear of returning to work, which should "diminish" as vaccinations move ahead; lingering childcare needs; and federal supplements to unemployment insurance.
Swonk also noted that the statement following the June meeting was much more "upbeat" about the progress of vaccinations and the economy, calling it "the most optimistic stance" the Federal Reserve has taken since January 2020, before the pandemic took hold.
Noting Powell's bullish language on the economy after the meeting, Swonk said, "He replaced the terms 'moderate' and 'modest,' which have dominated Fed rhetoric since before the pandemic, with 'strong,' 'solid' and 'supply constraints' to describe what we are seeing."
Despite being bullish on the economy, the Fed chair told reporters, "We are not out of the woods at this point." He said it is "premature to declare victory" and encouraged people to continue getting vaccinated.
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