Fed’s Powell says supply chain snags and inflation will persist into 2022

Federal Reserve chair Jerome Powell on Wednesday said it was frustrating that supply chain bottlenecks are not improving this deep into the recovery from the recession triggered by the coronavirus, and it appears they will persist into 2022 and continue to prop up inflation.

Powell, speaking at a virtual European Central Bank event alongside the heads of the ECB, Bank of Japan and Bank of England, also said that the ongoing pandemic remains the key factor steering the course of US monetary policy.

“It is frustrating to acknowledge that getting people vaccinated and getting Delta under control 18 months later still remains the most important economic policy that we have,” Powell said in response to a question on the US economic outlook.

“And it’s also frustrating to see the bottlenecks and supply chain problems not getting better, in fact at the margin apparently getting a little bit worse.

“We see that continuing into next year probably and holding inflation up longer than we had thought,” Powell said. “But ultimately the outlook for next year among my colleagues and me at the Fed for next year is quite a strong year with growth quite above trend and unemployment reaching significantly lower levels than now.”

Fed officials at their meeting earlier in September downgraded their views of US GDP growth for this year but upgraded estimates for 2022, reflecting expectations that activity for the balance of this year will be stymied by supply issues and those restraints will fade in 2022.  

Powell also said resolving “tension” between high inflation and still-elevated unemployment was the most urgent issue facing the Fed now.

“This is not the situation that we have faced for a very long time and it is one in which there is a tension between our two objectives. Inflation is high and well above target and yet there appears to be slack in the labour market,” Powell said, an apparent reference to the 1970s bout of US “stagflation” that combined high unemployment and fast-rising prices.

The US is more than 5-million jobs short of where it was before the pandemic. At the Fed’s most recent meeting policymakers lifted their inflation forecasts for this year to 4.2% — more than twice the targeted level of 2%. They see that pace easing in 2022 to 2.2%, modestly above where they had pegged it in their previous projections in June.

Asked about his biggest concerns right now, Powell referred to the possible clash between the Fed’s two goals of stable prices and full employment, a situation that could force the Fed to make trade-offs between the two by raising interest rates to tame prices at a time when it still wants to encourage job growth.

“Managing through that over the next couple of years is the highest and most important priority and it is going to be very challenging,” Powell said at the virtual event.

Reuters