Federal Reserve Chairman Jerome Powell sought to explain to lawmakers how the central bank got caught off guard by the current bout of historic inflation.
During his confirmation hearing, Powell blamed the Fed’s inflation call on two central issues: lingering supply chain problems and a slow return of workers to the jobs market.
“We and other forecasters, we believed based on our analysis and discussions with people in industry that the supply side issues would be alleviated more quickly than now appears to be the case,” Powell said. “Substantially more quickly.”
The Fed chief added that officials expected a “much more significant return to the workforce than has turned out to be the case.”
“While that is not what is causing current inflation,” Powell said, “labor supply can be an issue going forward for inflation, probably more than the supply side issues.”
Powell said supply side challenges have been “more persistent and more substantial” than expected.
Of course, it wasn’t just the Fed that inflation wrong. Very few forecasters on Wall Street anticipated inflation would be this high for this long.
Looking ahead, Powell said his expectation is there will be “some relief” on the supply front this year and global supply chains “will loosen up.”
If that doesn’t happen and inflation proves to be “even more persistent and higher,” Powell said that would increase the risk of it “becoming entrenched in the psychology” of businesses and households.
“That would indicate that we would respond,” he added.