Fed's Powell: Inflation will linger well into next year

Federal Reserve Chair Jerome Powell, in testimony prepared for delivery Tuesday at the US Senate Banking Committee, and released Monday by the Fed, said that he continues to expect high inflation to recede over the next year as supply and demand come into better balance, but warned that prices could continue to rise for longer than earlier thought.

"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."

"In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace."

The recent rise in COVID-19 cases along with the emergence of the new Omicron variant pose "downside risks" to employment and economic growth, and "increased uncertainty for inflation," Powell added.

The Fed, Powell promised, "is committed to our price-stabilty goal" will use its to support the economy and the labor market but also to prevent any upward spiral in inflation.

Key comments

• Factors pushing inflation upward will linger well into next year - prepared testimony to senate banking committee.
• Inflation running well above 2% goal, pushed up by pandemic-related supply and demand imbalances
• continue to expect inflation will move down significantly over the next year.
• We will use our tools to support economy and strong labor market, and to prevent higher inflation from becoming entrenched.
• Economy continues to strengthen.
• conditions in labor market have continued to improved.
• Still ground to cover to reach maximum employment, expect progress to continue.
• Slack is diminishing in the labor market.
• Rise in covid cases, omicron variant pose downside risks to employment, increased uncertainty for inflation.

Market implications

This is supportive of the US dollar that is likely to outperform from both a risk-off profile and due to the divergence between the Federal Reserve and those central banks of other nations where growth is lagging the US.