Although conditions in the labor market have improved over the first half of the year, the Federal Reserve is closely monitoring the recent increase in inflation and plans to continue its monthly purchases of Treasuries and mortgage-backed securities, Chairman Jerome Powell said Wednesday.
Job gains should be strong in coming months as labor demand remains high, but the "pandemic-induced declines in employment last year were largest for workers with lower wages and for African Americans and Hispanics," Mr. Powell said during his semi-annual monetary policy report before House Financial Services Committee. "Despite substantial improvements for all racial and ethnic groups, the hardest-hit groups still have the most ground left to regain."
Inflation will likely remain elevated in coming months before moderating, Mr. Powell said, pointing to strong demand in sectors where production bottlenecks or other supply constraints have limited production that has led to rapid price increases for some goods and services. "The very high inflation readings are coming from a small group of goods and services that are directly tied to the reopening of the economy — it's new cars, used cars, rental cars, hotel rooms, airplane tickets," Mr. Powell said in response to a question from Rep. Ann Wager, R-Mo.
In assessing the appropriate stance of monetary policy, the Fed will continue to assess incoming data and is "prepared to adjust the stance of monetary policy as appropriate if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal," Mr. Powell said.
The Fed, which issued its Monetary Policy Report July 9, will also continue its monthly purchases of $80 billion of Treasuries and $40 billion of mortgage-backed securities until "substantial further progress" was made on inflation and employment, Mr. Powell said.
When asked by Rep. Carolyn Maloney, D-N.Y., about what Mr. Powell would need to see before supporting tapering the Fed's asset purchases, he said it's "very difficult to be precise about it because with maximum employment there are no three or four or five or six metrics that you can point to. It really is a very broad range of things, including wages, unemployment, levels of employment, participation."
He was also asked about the Fed's work on climate change, to which he responded that it's part of the central bank's pre-existing mandates for supervising financial institutions and the overall stability of the financial system. Mr. Powell added that the Fed is currently "in the beginning stages of working up a program that will engage with financial institutions" to ensure institutions are aware of, and capable of, handling risks, including risks from climate change.
The Fed has kept the target range for its benchmark policy rate unchanged at zero to 0.25% since March 2020. The Federal Open Market Committee is scheduled to meet July 27-28. Mr. Powell is to testify before the Senate Banking Committee on Thursday.
