Fed's Powell says higher inflation likely to linger

While the U.S. economy has strengthened in recent months, higher inflation will likely persist into 2022, and the emergence of the new omicron COVID-19 variant poses risks to employment and economic activity, Federal Reserve Chairman Jerome Powell said Tuesday.

"Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate," Mr. Powell said in testimony before the Senate Banking Committee. "It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year."

With persistent levels of higher inflation in mind, Mr. Powell said the Fed may speed up plans to taper its monthly bond purchases. Those purchases — $80 billion in Treasury securities and $40 billion of mortgage-backed debt each month — were established in response to the coronavirus pandemic last year. At its last meeting in early November, the Fed indicated that it would scale back its bond purchases by $15 billion a month starting in November.

But with new information available, the Fed's assessment may change. "At this point the economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner," Mr. Powell said.

On the pandemic, Mr. Powell said the "recent rise in COVID-19 cases and the emergence of the omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people's willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions."

Treasury Secretary Janet Yellen, who testified alongside Mr. Powell on Tuesday, noted that the unemployment rate is 4.6% — the lowest level since the start of the pandemic. She urged senators to pass President Joe Biden's Build Back Better Act "to ensure America thrives in a post-pandemic world."

The nearly $2 trillion social spending bill, which the House passed Nov. 19, would make investments in clean energy, expand Medicare and establish universal prekindergarten, among other items. It also includes a few retirement provisions, including closing so-called backdoor Roth IRA strategies by prohibiting all employee after-tax contributions in qualified plans and after-tax individual retirement account contributions from being converted to Roth regardless of income level.

Democrats, who narrowly control the House and Senate, are aiming to pass the bill via reconciliation, meaning they need only a simple majority in the Senate instead of the usual 60 votes. No Senate Republicans are likely to vote in favor, with a vote expected in December.