Federal Reserve chair Jay Powell made his second appearance before the US Congress on Thursday to take questions on inflation, the health of the economy, asset prices and bank regulation, but it was one of his predecessors who had a bigger impact late in the day.
In his appearance before the Senate banking committee, Powell repeated his message from Wednesday’s session before the House of Representatives finance committee that the central bank was looking for the current spurt to ease.
Again it was Republicans who asked the silliest questions in an attempt to blame the Biden administration for the spurt in inflation through the big stimulus package approved earlier this year, instead of the one off impact from costs surging as the economy rebounds from 2020’s lockdowns.
Powell and others continue to point out that the biggest driver in the inflationary surge is one offs like higher air fares and travel costs and especially surging used and new car prices because of a shortage of new vehicles caused by the unprecedented shortage of key computer chips.
Reuters said Powell delivered the same pledge of “powerful support” to complete the US economic recovery as he did on Wednesday before the House Financial Services Committee, “an indication he sees no need to rush the withdrawal of support from the economy because of a recent jump in inflation.”
“We are experiencing a big uptick…Night and day we are thinking about that and asking ourselves if we have the right frame of reference,” Powell told the Senate committee.
But overall he said the prices that are rising, such as for used cars, “have a story” related to the pandemic reopening and are “more idiosyncratic than broad.”
And that story is the one-off nature of many of the drivers in the recent price surge.
His testimony added to the downward pressure on bond yields that his Wednesday comments had.
The upshot was the yield on the 10-year Treasury bond fell to just over 1.30% at the close of the US session after dipping under that level in a re-run of the slide in yields (and rise in bond prices) of the previous week. Then yields got as low as 1.24%.
Later in the today Treasury Secretary Janet Yellen, a former Fed chair under President Obama pointed out that prices could continue to rise for several more months, though she expects the recent startling inflation run to ease over time.
“We will have several more months of rapid inflation,” Yellen told CNBC. “So I’m not saying that this is a one-month phenomenon. But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.”
All of that has added up to concern that inflationary pressures could stall the aggressive U.S. economic recovery, with the housing escalation raising fears of a bubble.
“So I don’t think we’re seeing the same kinds of danger in this that we saw in the run-up to the financial crisis in 2008,” Yellen said. “It’s a very different phenomenon.
“But I do worry about affordability and the pressures that higher housing prices will create for families that are first-time home buyers or have less income,” Ms Yellen said.
Economists at Moody’s said in their weekly note published on Friday morning that the current inflationary surge is being boosted by “transitory factors”.
“The reopening of the economy is a onetime event, and that is boosting a number of components of the CPI, including lodging away from home, vehicle rentals, and airfares along with admissions to sporting and other events. Based on their shares of the headline CPI, these added 0.1 percentage point to the gain in June, identical to that in May.
“However, vehicle prices, which are being boosted by low inventories and a global semiconductor shortage, continue to climb. New-vehicle prices were up 2% in June while used-car prices jumped 10.5%. New- and used-vehicle prices added 0.4 percentage point to the growth in the headline CPI in June.
That’s 0.5 of the 0.9% rise in the CPI accounted for one-off items that will fade in coming months.
“June’s increase in used-car prices leaves them 22.3% above their underlying trend. Deviations from trend in used-car prices don’t normally persist for an extended period of time.
“Odds are that the CPI for used-car prices will move closer to their trend over the course of the next year, which will be disinflationary,” they pointed out.
