Yesterday I warned about higher market volatility given all the moving parts in play at the moment. Well, we saw that in action again on Tuesday as FED Chair Powell gave evidence at the Senate Banking Committee.
Back in December Powell said “One of the two big threats to getting back to maximum employment is actually high inflation.” He stressed that getting back to pre-Covid levels of labor-force participation would require a long expansion, which couldn’t happen with runaway price growth.
This marked a shift in how he discussed the trade-off between wanting to see greater improvement in the labor market and tolerating persistently elevated consumer price growth. So the new line is that increasing interest rates and tightening monetary policy is a benevolent move on the Fed’s part.
And this was in evidence on Tuesday when he said “In a way, high inflation is a severe threat to the achievement of maximum employment,” he said. “We think wages moving up is generally a good thing, but if you look back through history, there are times when wages have moved up in a way that has fostered persistent inflation, and that hurts everyone.”
This is a deft move on the part of Powell, who earned respect among both Democrats and Republicans for the Fed’s response to the onset of the Covid-19 pandemic.
