“They are committed to ensuring that there is no further tantrum,” said Subadra Rajappa, head of US interest rate strategy at Société Générale. The goal in strengthening low interest rates and a steady course for buying assets is to “talk the market down”.
Fed officials and private forecasters expect economic activity to pick up strongly once vaccines become widely available. They also acknowledged that short-term technical factors are likely to cause inflation to rise in 2021, and that a short-lived spike in price spikes would not necessarily be of concern to Fed policy makers.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a television interview with Bloomberg earlier Thursday that temporary spikes in inflation would not necessarily signal that tepid price gains – the problem of the modern economy – are a thing of the past.
“It is quite possible that we will see peaks of over 2 percent. In fact, the inflation calculation would suggest that we will get some spikes in the middle of the year, ”she said. “This is not a victory for price stability.”
Mr Powell also admitted that inflation could rise temporarily, but said the rebound would be “very unlikely” to result in sustained faster gains. If inflation rises significantly, the Fed knows how to use policy to counteract it.
“Too low inflation is a much more difficult problem,” he said.
He reiterated that the Fed, which has made a habit of raising interest rates to prevent the labor market from overheating, would no longer do so – instead, continue to tighten the labor market as long as there were no excesses.
“We have seen the social benefits that a strong labor market can and does bring,” Powell said, referring to the most recent business cycle, when unemployment fell to 3.5 percent but wage and price increases were modest. “One of the great lessons from the last crisis was how much room there was for labor force participation.”
And he said he believed the economy could return to pre-crisis levels.
“I’m optimistic about the economy for the next few years, I really am,” said Powell. “We have to get through this very difficult time this winter with the spread of Covid.”