Commentary On the longest day of the year, the U.S. House Committee on Financial Services welcomed Federal Reserve chairman Jerome Powell to address its concerns around inflation and weakness in the U.S. economy. Powell warned Congress that the fight against inflation is far from over, that the battle will be a long, hard slog, and that the U.S. economy and labor markets will likely be negatively impacted before victory—price stability defined as 2 percent inflation—can be declared.
Powell commented that “inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.” He also noted that “longer-term inflation expectations appear to remain well anchored,” meaning that businesses, households, and financial markets are behaving as if they believe inflation is here to stay. High inflationary expectations can be dangerous because they can become self-fulfilling prophecies. Market participants seek to outrun inflation by proactively raising prices (producers) or buying more and earlier than normal (producers and consumers) to avoid price hikes later. Both behaviors tend to be pro-inflationary….