WASHINGTON – Hiring is accelerating as Americans increasingly venture out to shop, eat at restaurants and travel, and inflation pressures are even picking up after lying dormant for years. Yet this week, the Federal Reserve is all but sure to reiterate its commitment to ultra-low interest rates.
At a news conference Wednesday after the Fed's latest policy meeting ends, Chair Jerome Powell will likely underscore his view that the economy is far from fully recovered and needs the central bank’s continued support in the form of low borrowing costs. There are still 8 million fewer jobs than there were before the pandemic struck. And the unemployment rate, at 6%, though well below where it was a year ago, remains elevated.
Powell has stressed that further gains in the job market are needed to help the many Americans — especially low-income workers and people of color — who have been disproportionately hurt by the loss of jobs and incomes and have yet to benefit from the early stages of the recovery.
At the same time, the central bank this week could bring into sharper focus the significance of the gamble the Powell Fed is taking in its approach to inflation. Under a new framework the Fed adopted last summer, it will no longer raise rates in anticipation of high inflation, which had been its policy for decades.
Instead, Powell and other Fed officials have made clear they want to see inflation actually exceed their 2% annual inflation target — and not just briefly — before they'd consider raising rates. The Fed's policymakers have said they would like inflation to remain above 2% for “some time,” without specifying how long that might be.
They've set that goal so that inflation would average 2% over time, to offset the fact that inflation has been stuck below 2% for nearly the entire past decade. Fed policymakers favor price gains at that level as a cushion against deflation — a prolonged drop in prices and wages that typically makes people and companies reluctant to spend.
Seeking to allay any concerns about rising prices, Powell has said he thinks the inflation pressures that are now building in the U.S. economy, partly in response to clogged supply chains that have created shortages of some goods and components, will prove temporary. That's because for now, Americans don’t expect prices to rise much in the long run.
Once expectations for inflation do rise, they can be self-fulfilling: Workers start demanding higher pay to offset expected price gains, and retailers begin raising prices to offset increased wages and supply costs. This can set off a wage-price spiral, something the United States last experienced in the late 1960s and 1970s.