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Powell: 'Big part of inflation' won't be affected by what the Fed does despite its 'unconditional' fight for price stability

Kitco News

(Kitco News) In another grilling testimony session, Federal Reserve Chair Jerome Powell admitted that the U.S. central bank underestimated inflation and added that the Fed's tools wouldn't resolve a big part of the problem.

Even though the Fed's resolve to fight inflation is "unconditional," there is only so much the Fed can do when battling out-of-control price growth, Powell said during his testimony before the U.S. House of Representatives Financial Services Committee Thursday.

"A big part of inflation won't be affected by our tools, but a big part of it will be," Powell said. The part that will be impacted by the Fed's aggressive hiking cycle is demand, which will get suppressed via higher rates, the Fed chair explained.

"Fed isn't looking for new tools," he said. "Our tools are blunt, but they are the right tools to deal with demand."

Powell described that when the Fed raises interest rates and shrinks the balance sheet, rates go up across the economy and financial conditions tighten. More specifically, higher rates will lower demand for durable goods, drive asset prices down and discourage spending, the Fed chair noted.

"Automobiles and other durable goods will be impacted. Asset prices generally. [There will be] a little less spending. And the exchange rate — also has disinflationary effects," he said.

Powell testified that the Fed intends to bring inflation down to 2% without hurting the labor market too much, but that has become "more challenging" due to external factors like the war in Ukraine, which is driving food and energy prices higher.

On why the Fed underestimated inflation, Powell clarified that the wrong line of thinking was the expectation that the supply chain disruptions would resolve quite quickly.

"The thought was people would come back" as vaccines would get rolled out and "we'll be done with COVID by the end of the year," Powell said. "That was the judgment we had to make. We knew it could be wrong. And when it started to look pretty wrong, we pivoted."

And despite a more complicated path toward the "softish landing" the Fed wants, Powell still estimates for growth to be fairly strong in the second half of the year.

Fed will pivot policy, lower rates by Q1 2023, spark new bull run for gold, silver

Crypto volatility was another heated topic of discussion during the testimony.

On the regulation front, Powell said that he was encouraged by the many bills Congress is working on. "It is important to get it done quickly. There comes the point that regulation is needed to protect the public. That time is coming for digital finance," he said.

On the Fed's central bank digital currency (CBDC), Powell ruled out the option of having a private stablecoin acting as the digital dollar.

"Do we want a private stablecoin to be a digital dollar? The answer is no. It should be government-guaranteed money, not private money created for the benefit of the private issuer," he said.

As Powell spoke, gold prices declined from their daily highs. August Comex gold futures were last at $1,832.50, down 0.32% on the day. The main downward drivers for gold on Thursday were crude prices, the U.S. dollar, and yields, said Kitco's senior analyst Jim Wyckoff.

"The key outside markets today see Nymex crude oil prices weaker and trading around $105.25 a barrel. The U.S. dollar index is firmer in midday trading. The yield on the 10-year U.S. Treasury note is fetching 3.05% and has dropped this week," Wyckoff wrote

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