The Economy

Fed Says Economy Not at Risk From Inflation Surge

It is still "appropriate to maintain" near-zero interest rates even though inflation "has increased notably this spring."
Matthew HellerJuly 12, 2021

The U.S. Federal Reserve has told Congress it isn’t planning to change its zero interest rate policy despite the recent surge in inflation.

As measured by the price index for personal consumption expenditures, inflation has jumped from 1.2% in December 2020 to 3.9% in May, well above the Fed’s inflation objective of 2%.

“Consumer price inflation has increased notably this spring as a surge in demand has run up against production bottlenecks and hiring difficulties,” the Fed said in its latest report to Congress on monetary policy.

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But the central bank expects these “extraordinary circumstances” will pass and that “it will be appropriate to maintain the current target range for the federal funds rate until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed that rate for some time.”

The Fed’s policy-making committee is “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals,” the report said.

According to Reuters, the report “documents the central bank’s view that the recovery remains on track as firms and families navigate a complicated economic reopening.”

“Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted,” while the financial system remains “resilient,” the Fed noted.

Fed officials have kept the benchmark interest rate near zero while continuing to buy $120 billion a month in Treasury bonds and mortgage-backed securities to put downward pressure on long-term interest rates.

The report will be the subject of hearings this week where lawmakers are expected to question Fed Chairman Jerome Powell about when the central bank will start cutting back on its bond purchases and when it will begin raising interest rates.

“The committee expects [the bond] purchases to continue at least at this pace until substantial further progress has been made toward its maximum-employment and price-stability goals,” the report said.