Fed’s Powell Concedes Anxiety About Higher Inflation but Resists Policy Shift

Mr. Powell said pandemic-related bottlenecks and other supply constraints for a small group of goods and services have led to rapid price increases. He said it would be an error to overreact to inflation that results from one-time increases in the prices of certain services, like air travel and hotel rates, or goods, like new and used cars, that have surged due to the reopening of the economy.

U.S. consumer prices continued to accelerate in June at the fastest pace in 13 years as the recovery from the pandemic gained steam. The Labor Department reported Tuesday that its consumer-price index increased 5.4% in June from a year earlier. Excluding volatile food and energy categories, prices rose 4.5% from a year earlier, the most in 30 years.

“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected–or that anybody had expected,” Mr. Powell said. “And to the extent it is temporary, it wouldn’t be appropriate to react to it. But to the extent it gets longer and longer, we’ll have to re-evaluate the risks.”

Mr. Powell said the central bank is in uncharted territory. “We don’t have an example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” he said. “We’re humble…. We’re trying to understand the base case and also the risks.”

Mr. Powell indicated he wasn’t in a hurry to start paring the Fed’s purchases of $120 billion a month in Treasury or mortgage securities. Several Fed bank presidents have indicated they are eager to start shrinking the pace of those purchases. Other senior Fed officials have suggested the central bank shouldn’t be in a rush.

“That’s a discussion we’re going to be having on an ongoing basis,” Mr. Powell said. His comments don’t suggest the Fed is prepared to make any final decisions at its next meeting on July 27-28.

The Fed has held interest rates near zero since the coronavirus pandemic hit the U.S. economy in March 2020. The central bank has said it expects to keep rates there until it is confident inflation will run moderately above the Fed’s 2% target and the labor market has healed, or returned to what it calls maximum employment.

Mr. Powell said the current level of inflation is well above the Fed’s goal. “This is not ‘moderately above 2% by any stretch… And we understand that,” he said.

The central bank also has committed to continue its bond purchases until achieving “substantial further progress” toward its inflation and employment goals.

Mr. Powell said Wednesday that the economy “is still a ways off” from reaching that standard but that officials expect progress to continue.

Write to Nick Timiraos at [email protected]