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Gold price ignores Powell's inflation stance: It's higher than expected, but it'll 'wane'

Kitco News

(Kitco News) Federal Reserve Chair Jerome Powell said that transitory inflation has been higher and more persistent than expected, but it will "wane."

"Substantial part or perhaps all of the overshoot in inflation comes from the impact of reopening of the economy," Powell told the members of the House Select Subcommittee on the Coronavirus Crisis on Tuesday.

The Fed chair highlighted items such as cars, airplane tickets, hotel prices. "Those are things that we would look to stop going up and ultimately start to decline," Powell said, while still being unclear on when that might be.

In one cautious similarity to the Fed's meeting last week, Powell admitted that these temporary effects on inflation "have been higher than we expected, and they may turn out to be more persistent than we expected."

However, he did state that the incoming data is still consistent with the view that these factors will "wane over time" as the Fed continues to monitor them carefully. "We see strong demand, while the supply side has been caught a little bit flat-footed."

When answering a question whether the U.S. could see inflation like in the 1970s, Powell replied: "I don't expect anything like that to happen."

Overall, the Fed chair once again signaled that the central bank would remain patient in light of the incoming data, adding that the central bank has to be "very humble" when interpreting the macro data given "such an unusual setting of reopening the economy."

When talking about inflation measures, Powell highlighted that the Fed prefers the PCE index because its basket is updated on a monthly basis. He added that even with that measure, it is difficult because people are "changing their consumption patterns."

Many of the questions Powell received had to do with whether labor shortages in the U.S. could be blamed on unemployment benefits.

"Unemployment benefits may be a factor, but it will be a temporary one," he said, adding that the benefits will be expiring by the fall.

Powell continued to list coronavirus fears, school closures, and the time it takes to find a new job as the top reasons for the labor shortages seen in the U.S.

"A significant number of people report not wanting to work because they are afraid to get an infection or are afraid to spread it. Schools are not opened yet. Unemployment insurance may interact with those longer factors and lead to the job search going on longer," he said. "Right now, it is about finding a new job. The matching function could be more labor-intensive, and there may be a speed limit on it."

Powell added that he expects much higher job numbers in the fall.

U.S. dollar to remain the reserve currency

Russia and China dumping the U.S. dollar were also brought up during the hearing. But Powell brushed the question aside, stating that it is "not something on our radar screen."

"Dollar is the world's reserve currency. Nothing is close to competing with it. Don't see that changing any time soon," he said.

When addressing the unsustainable debt levels in the U.S., Powell said that there is "no question that U.S. government will be able to pay its bills for the foreseeable future."

He also stated that the county is on "an unsustainable path," but the time to address will be when the economy is strong and the unemployment level is low.

Gold did not react to Powell's comments after losing $100 last week after the Federal Reserve monetary policy meeting announcement, which revealed higher inflation expectations and a possibility of two rate hikes as early as 2023. August Comex gold futures were last trading at $1,778.30, down 0.26% on the day.

Live 24 hours gold chart [Kitco Inc.]

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