Jerome Powell, the Federal Reserve chairman, signaled Tuesday that the central bank is growing more concerned about high -- and stubborn -- inflation, and could speed up its plan to withdraw economic support as it tries to ensure that rapid price gains do not become long-lasting.
His comments, delivered during a Senate Banking Committee hearing, came at a challenging economic moment for the Fed. Prices for food, shelter and other items are rising quickly, millions of workers have yet to return to the labor market and the virus continues to pose risks to the economic outlook, most recently with the new omicron variant.
The Fed 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 per month, which would have the program ending midway through 2022. But Powell signaled Tuesday that the central bank could wrap up its bond-buying more quickly, cutting down the amount of economic juice the Fed will add in coming months.
Doing so would put the Fed on a path to begin raising its key short-term rate as early as the first half of next year. A higher Fed rate would, in turn, raise borrowing costs for mortgages, credit cards and some business loans.
"At this point, the economy is very strong, and inflationary pressures are high," Powell said during a hearing before the Senate Banking Committee. "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."
Powell said he expected Fed officials to discuss slowing bond purchase 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 variant of the coronavirus, a fresh labor market report and updated inflation numbers.
Powell made it clear that it was too soon for Fed policymakers -- or anyone -- to tell how much the new variant will affect the economy, since that will hinge on how easily it transmits and whether it causes more severe disease.
"What I'm told by experts is that we'll know quite a bit about those answers in about a month," he said. "We'll know something, though, within a week or 10 days."
For now, he said, "it's a risk, it's a risk to the baseline -- it's not really baked into our forecasts."
While omicron's danger remains uncertain, another virus surge would pose a double-barreled threat to the economy. It could prevent workers from returning to the job market just as it prevents roiled supply chains from returning to normal, keeping a full labor market recovery at bay while making inflation last longer. And the potential threat hits at a fraught moment for policymakers.
The economy has boomed back this year, and hot demand has collided with constrained supply to push inflation sharply higher. The central bank has slowly reoriented its economic policy stance as price gains remain stubbornly elevated, trying to put itself in position to react if needed. Now, the Fed appears to be pivoting more aggressively -- and focusing more concertedly on controlling rapid inflation.
"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," Powell said Tuesday. "I think the risk of higher inflation has increased."
YELLEN ON CEILING
Treasury Secretary Janet Yellen also testified before the Senate Banking panel and urged Congress to raise the nation's borrowing limit. Yellen has previously warned that without a hike in the debt ceiling, the U.S. government could default on its debt obligations for the first time soon after Dec. 15.
"I cannot overstate how critical it is that Congress address this issue," Yellen said. "America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery."
Congress is expected to address the borrowing limit and also faces a Friday deadline to provide enough funding to keep the federal government open.
Stock prices tumbled after Powell's comments, with the Dow Jones Industrial Average closing down about 1.8% and the S&P 500 down 1.9%.
"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 Powell's comments.
REPUBLICAN CRITICS
The shift in the Fed's policy approach comes at a sensitive moment for Powell. The Biden administration announced last week that it will renominate him as chair of the Fed, and that it will elevate Lael Brainard -- now a governor -- as the central bank's vice chair. Both await Senate confirmation.
The twin threats of lasting supply chain disruptions and another pandemic flare also come as Republicans are trying to pin high inflation on the Biden administration and its policies. Several Republican senators asked combative questions of Powell and Yellen Tuesday, at times trying to back them into blaming rapidly rising prices on President Joe Biden's policies.
The barrage of criticism came as Democrats are working to pass another $2.2 trillion climate change and social policy bill before the end of the year.
Yellen defended the Biden administration's economic agenda, insisting that the policies are fiscally responsible and that they would reduce costs for families at a time when prices are rising.
Republicans, who four years ago passed $1.5 trillion in tax cuts that went mostly to the rich, assailed the spending proposals as reckless. 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.
Information for this article was contributed by Jeanna Smialek and Alan Rappeport of The New York Times; and by Christopher Rugaber of The Associated Press.