Prices in the US have been increased at a rate of nearly 7% year-on-year, and the chairman of the US central bank said they will have no choice but to increase short-term borrowing rate if the inflation does not slow down.
Jerome Powell, chairman of the United States Federal Reserve, told a US Senate committee that the central bank will be forced to become more aggressive on raising short-term interest rates if the inflation does not slow down.
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“If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will,” Powell said in a Senate Banking Committee hearing, reported Yahoo! Finance.
The stakes are higher than ever for the Fed this year, with prices increasing at nearly 7% year-on-year. The Fed has spent the past year and more trying to understand how much of the inflation is due to rising demand and how much was due to COVID-caused constrained supply.
Powell said both appear to be factors causing high inflation, while acknowledging that demand is “very strong” right now. He said the Fed can do something about the demand, but is powerless to act against the supply. "But this really is a combination of the two,” Powell said.
According to observers, the Fed is moving quickly in a bid to undo the effects lax policies effected during the worst phase of the pandemic.
In addition to keeping zero interest rates, the central bank has taken a hit to the tune of trillions in US Treasuries and agency mortgage-backed securities. The so-called quantitative easing programme has served as a messaging device to markets on its intention to keep policies “accommodative”, reported Yahoo! Finance.
Faced with ever-rising inflation, sources said the Fed now plans on ending the programme earlier than expected--it was originally supposed to end in March. Once that is done, the Fed will look at increasing interest rates, observers said.
“It really is time for us to begin to move away from those emergency pandemic settings to a more normal level. It really should not have negative effects on the employment market,” Powell said.
(Edited by : Vijay Anand)