Powell: Fed keeping eye on financial system vulnerabilities; inflation has ‘increased notably’

Achieving and sustaining maximum employment and price stability depends on a stable financial system, and the Federal Reserve continues to monitor vulnerabilities in the banking system, the chair of the agency’s board said in testimony Wednesday.

Appearing before the House Financial Services Committee for the semiannual monetary policy report to Congress, Federal Reserve Board Chair Jerome H. (“Jay”) Powell said asset valuations have generally risen as the economy has improved and investor risk appetite has grown.

“Household balance sheets are, on average, quite strong, business leverage has been declining from high levels, and the institutions at the core of the financial system remain resilient,” the Fed chair said.

Regarding inflation, Powell acknowledged that it has “increased notably” and will likely remain elevated in the months ahead before moderating.

“Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” he told the committee. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”

Powell told the committee that the Fed’s rate-setting Federal Open Market Committee (FOMC) seeks longer-term inflation expectations that are “well anchored at 2%” to avoid long periods of low or high inflation. “Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC’s longer-run inflation goal,” he said.

Testimony by Chair Powell on the semiannual Monetary Policy Report to the Congress