Fed chief says pandemic aid not main driver of US inflation

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WASHINGTON: Federal Reserve Chairman Jerome Powell on Thursday (June 23) downplayed the notion that government pandemic aid was the key factor fueling US inflation, instead blaming a confluence of global issues, including war in Ukraine.

Although stimulus spending was a factor, “a lot of the price increases you saw were a matter of supply not being able to meet demand” and “when demand hits fixed supply, which going on is that prices are going up,” Powell told lawmakers.

Inflation in the United States has hit its highest level in 40 years, accelerating in recent months as the fallout from Russia’s invasion of Ukraine sent fuel and food prices soaring, with gas over $5 a gallon for the first time, putting a strain on American families.

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Opposition Republicans blamed President Joe Biden’s US$1.9 trillion US bailout package approved last year for the meteoric price increases.

But Powell, who was testifying before a House committee on Thursday, and others noted that inflation is a global problem.

Democratic lawmaker Gregory Meeks noted that the price increases were mainly caused by “supply chain, China shutdown – full shutdown, zero Covid policy, Russia’s war in Ukraine, Covid.”

“Isn’t it just a huge storm of everything, is it contributing to inflation and causing it all over the world?” Meeks asked.

“Pretty much. That’s a pretty good description,” Powell said during the second day of his semiannual congressional testimony.

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And, some of these factors are “out of our control – for example, the price of oil and most food prices”.

“UNCONDITIONAL” BATTLE AGAINST INFLATION

The Fed has said for months that price pressures should be transitory, but Powell admitted that in hindsight the Fed had underestimated the rise in inflation.

The U.S. central bank announced the biggest interest rate hike in nearly 30 years last week and promised more similar moves as part of its aggressive push to put out the fires of inflation.

These measures raised fears that the Fed could trigger a recession in the world’s largest economy.

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Powell said the commitment to bring inflation down to 2% from 8.6% in May is “unconditional”, but he warned that the Fed lacked “precision tools” and acknowledged that he there was a risk of a slowdown.

Avoiding this “has become much more difficult with the events of recent months, especially the war”, he said.

But even if unemployment rises above the current all-time low of 3.6%, even an unemployment rate of 4.3% “still a very strong labor market.” he noted.

And the United States, unlike some other countries, has “a very strong economy” and Fed policymakers “have tools to deal with demand,” Powell said.

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