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Fed Chair Nods to Stimulus Wind-Down

Federal Reserve Chair Jerome Powell testified at a Senate Banking Committee hearing that the U.S. economy no longer needs aggressive stimulus, according to The Wall Street Journal (subscription).

The challenge: “Mr. Powell has been trying to balance two risks over the past year: raising interest rates prematurely and risking a prolonged period of elevated unemployment, or providing too much stimulus that allows higher inflation to become entrenched, forcing a faster adjustment later.”

Where we are: The economy is no longer experiencing the kind of trauma that initially pushed the Fed to implement strong stimulus measures. Instead, we’re seeing a relatively strong economy by traditional measures that no longer requires aggressive support.

  • Low unemployment: The unemployment rate has fallen to just 3.9%, putting it at a lower rate than when Powell became chairman four years ago. That number is down from the 14.7% unemployment rate that the United States experienced less than two years ago.
  • Increased wealth: A rise in the value of assets like stocks and homes has left many Americans in a better financial position than they were before the pandemic, causing some to retire early and contribute to the tight labor market.
  • High inflation: 12-month inflation is currently at its highest level in decades, with core consumer prices up 4.7% in November from the previous year. The Fed’s preferred target would have inflation at just 2%.

Patience needed: Powell cautioned that while the Fed might take initial steps soon to jettison emergency-era programs, winding down the policies that have pumped up the U.S. economy would be a slow process.

  • “It is really time for us to move away from those emergency pandemic settings to a more normal level,” said Powell. “It’s a long road to normal from where we are.”

More on inflation: Powell maintained that “much of the inflammation pressures the U.S. is experiencing will ebb on their own as supply chain snafus and labor force shortages associated with the pandemic ease,” reports Bloomberg (subscription).

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