Data-focused Powell says may take more than 3 years to hit Fed inflation goal

WASHINGTON: It may take more than three years to reach the Federal Reserve’s inflation goals, Fed Chair Jerome Powell told lawmakers on Wednesday, a further signal the US central bank plans to look beyond any post-pandemic spike in prices and leave interest rates unchanged for a long time to come.

“We are just being honest about the challenge,” Powell told the House of Representatives Financial Services Committee when asked about Fed projections that inflation will remain at or below the central bank’s 2% target through 2023.

The Fed has said it will not raise interest rates until inflation has exceeded 2% and “we believe we can do it, we believe we will do it. It may take more than three years,” Powell said.

The Fed chief’s remarks are the latest in a broad central bank effort to explain to the public and particularly to bond market investors why its policies will likely remain unchanged for perhaps an extended period of time.

Yields on US Treasury bonds have risen recently, with the risk of a potential spike in inflation in focus as the United States expands its coronavirus vaccination program and moves toward a post-pandemic reopening of the economy, and some conjecture the Fed may need to tighten its policies faster than expected.

But Powell and other policymakers have consistently rebutted that idea with a simple formula: watch the data.

The Fed, for example, has said it plans to continue buying $120 billion per month in US government and government-backed securities “until substantial further progress has been made” towards the Fed’s maximum employment and inflation goals.

With the inflation target a long way off, Fed officials have focused on what they see as a major gap in the labor market as well – a scar that goes well beyond the headline unemployment rate to include concerns about disproportionate joblessness among minorities, and the exodus of women from the labor force.

Powell, who is testifying in Congress this week as part of his mandated twice-a-year appearances on Capitol Hill to provide updates on the economy, said the Fed needs to see tangible progress before shifting gears, not just anticipated improvement.

The policy “is what it sounds like – incoming actual data that sees us moving closer to our goals,” he told lawmakers.