Jerome H. Powell, the Federal Reserve chair, signaled on Tuesday that the central bank was growing more concerned about high — and stubborn — inflation, and could speed up its plan to withdraw financial support from the economy as it tries to ensure that rapid price gains do not become long-lasting.
Mr. Powell, whom President Biden plans to renominate for a second term, testified before the Senate Banking Committee at a fraught economic moment. Inflation has jumped to its highest level in three decades and a new coronavirus variant, Omicron, threatens to keep the economy from returning to normal, potentially dragging out supply and demand mismatches. Yet millions of workers are still missing from the job market — and the health threat could keep them on the sidelines.
As arguably the nation’s most important economic policymaker, Mr. Powell must navigate that divide. His comments Tuesday suggested that he was preparing to do it with an eye more firmly focused on the threat of inflation.
That could mean ending the Fed’s bond-buying program sooner than expected. The central bank had been buying $120 billion in government-backed securities each month throughout much of the pandemic to bolster the economy by keeping money flowing in financial markets. In November, officials announced plans to slow those purchases by $15 billion a month, which would have the program ending midway through 2022. But Mr. Powell said the central bank could wrap up more quickly, reducing the amount of economic juice the Fed is adding.
“At this point, the economy is very strong, and inflationary pressures are high,” he said. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”
His comments further rattled investors, who had already been fretting about Omicron’s potential impact. Stocks, which had been down roughly 0.5 percent for much of the morning, tumbled after Mr. Powell’s comments and the S&P closed down 1.9 percent. Short-term bond yields, which are heavily influenced by expectations for Fed rate increases, spiked as investors began to expect what is sometimes referred to as a “hawkish,” or aggressive approach to interest rate policy.
“The tone of his remarks was notably hawkish, suggesting that the Fed’s primary focus is on the risk of more persistent excess inflation,” Krishna Guha, an economist at Evercore ISI, wrote in a research note reacting to the testimony.
Mr. Powell said he expected Fed officials to discuss slowing bond purchases faster “at our upcoming meeting,” which is scheduled for Dec. 14-15. He stressed that between now and then, policymakers will get a better sense of the new Omicron virus variant, a fresh labor market report and updated inflation numbers.
While he emphasized that much is unknown about Omicron, he said experts could get a better sense of it “in about a month,” and will know at least something about the risks “within a week or 10 days.”
For now, he focused on the risk the central bank has already come to know: rapid price gains. Inflation is running at its fastest pace since the early 1990s in the United States, and prices have picked up in Europe and across many other advanced economies as booming consumer demand runs into sharply constrained supply. In the eurozone, annual inflation jumped to 4.9 percent, according to data released Tuesday, the highest since records began in 1997. Global factory shutdowns, clogged ports and unusual shipping patterns have driven shortages in couches, cars and computer chips.
Fed officials had for months predicted that the snarls would clear and price gains would fade. Instead, they have broadened — and that has made central bankers like Mr. Powell increasingly worried.
“Generally, the higher prices we’re seeing are related to the supply-and-demand imbalances that can be traced directly back to the pandemic and the reopening of the economy, but it’s also the case that price increases have spread much more broadly in the recent few months,” Mr. Powell said Tuesday. “I think the risk of higher inflation has increased.”
Monetary policymakers had spent recent months focused on helping the economy to heal, hoping to pull the millions of workers still missing from the job market back into work.
To that end, the Fed’s policy interest rate, its more traditional and more powerful tool, has remained set to near zero. Officials had been stressing that they would be patient in pulling back that support and cooling down the economy, giving missing employees more time to return.
But their tone appears to be shifting as prices for food, rent and goods are jumping.
Slowing bond purchases quickly would put officials in a position to raise borrowing costs sooner than previously forecast. Lifting interest rates earlier or faster would pump the economic brakes, helping to slow home-building, business expansions and consumer spending. Weakening demand would in turn help to weigh down prices over time.
By trying to rein in price increases, the Fed would probably slow hiring. Doing so could be painful while people still remain out of work partly out of virus fears or a lack of child care.
That’s why Omicron could pose such a big challenge. If the new variant shuts down factories and slows shipping routes while keeping would-be job applicants at home, it could put the Fed in a tough spot. Central bank policymakers are supposed to foster both full employment and keep prices stable, and such a situation would force them to choose between those goals.
Mr. Powell’s willingness to pull back support faster despite the new variant — and his full-throated recognition that price gains are not poised to be as short-lived as officials had once hoped — caught investors’ attention.
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“The Fed is the ultimate owner of the ‘transitory’ characterization, and the chair’s decision to move beyond that is a decidedly hawkish step,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, in a note to clients shortly after Mr. Powell’s comments.
At one point, Mr. Powell even said that at “coming meetings” he expected the Fed’s policy-setting committee would say that when it comes to inflation, its standard for lifting interest rates had been met. That would mean that central bankers would simply be looking to the job market as they weighed when, whether and how much to raise borrowing costs.
For Mr. Powell, the timing is complicated. The Biden administration announced last week that it would renominate him as chair of the Fed, and that it would elevate Lael Brainard — now a governor — as the central bank’s vice chair. Both await Senate confirmation.
Inflation is factoring into the political moment, as well, as Republicans try to pin high inflation on the Biden administration and its policies. Several Republican senators asked combative questions of Mr. Powell and Treasury Secretary Janet L. Yellen during their joint testimony on Tuesday, at times trying to back them into blaming rapidly rising prices on Mr. Biden’s policies.
Democrats, furthermore, are working to pass a $2.2 trillion climate change and social policy bill before the end of the year.
Ms. Yellen defended the Biden administration’s economic agenda, insisting that the policies were fiscally responsible and that they would reduce costs for families.
“The Build Back Better plan contains support for households to help address some of the most burdensome and most rapidly rising costs that they face,” Ms. Yellen said, pointing to proposals to make preschool free, provide expanded care for the elderly and increase education subsidies.
Republicans, who four years ago passed $1.5 trillion in tax cuts that went mostly to the rich, assailed the spending proposals as reckless. Ms. Yellen insisted that tax increases and an investment in the Internal Revenue Service to ensure that people and companies are paying the taxes they owe would prevent the legislation from adding to the debt.
“It is fully paid for, or even more than fully paid for,” Ms. Yellen said.
Others criticized the administration and Fed’s response to the virus and the risk that it posed, saying policymakers needed to accept that the disease would be around for a long time and should not react every time a new strain appeared.
“At what point do we just get back to a more normal execution of Fed policy?” Senator Thom Tillis, Republican of North Carolina, asked Mr. Powell.
“We have to be humble about our ability to predict this, or really understand,” Mr. Powell replied, after saying that the central bank did not expect the new variant to have fallout that is “remotely comparable” to the initial pandemic-spurred state and local lockdowns.
Matt Phillips contributed reporting.