Federal Reserve Chairman Jerome Powell expressed some concern about increasing inflation and stated that the central bank will be on the lookout for signals that people and businesses anticipate strong pricing pressures to continue.

“Supply-side constraints have gotten worse,” Mr. Powell said Friday at a virtual conference.

While the Fed anticipates that pricing pressures will ease as the pandemic declines, he believes it is critical for the central bank to remain flexible in the coming months.

Powell said the central bank will “need to make sure that our policy is positioned for a range of possible outcomes.”

Rising vaccination rates, along with roughly $2.8 trillion in federal expenditure approved since December 2020, have resulted in a rebound unlike any other in recent memory. Inflation has skyrocketed this year, with "core prices," which exclude volatile food and energy categories, up 3.6 percent year on year in August, according to the Fed's preferred measure. Powell added "we're on track to start tapering, completing by mid-2022."

The Fed must walk a fine line Wednesday as financial markets hang in the balance

Mr. Powell and his colleagues have firmly indicated that the Fed would formally announce a gradual decrease, or tapering, of its monthly purchases of $120 billion in Treasury and mortgage notes at its meeting on November 2-3. At their September meeting, officials discussed a strategy to cut such purchases by $15 billion every month, implying that the asset-purchase program will be completed by next June.

The Fed's stimulus program will be phased out faster than investors expected only a few months ago. It illustrates, in part, how this year's inflation increase is lasting longer than central bank officials and private-sector experts predicted.

Inflation statistics and an increase in energy costs since September indicate a widening of price pressures, and other central banks have announced plans to hike rates more aggressively.
This has spurred recent bond-market predictions of the Fed raising rates more quickly and early.

Additional Comments From Powell

Supply bottlenecks are still weighing and we cannot rule out another COVID spike this winter.

I believe job growth will return to the high levels seen last summer, but it may take longer than expected.

High inflation will likely last well into next year, but we still expect inflation to move back down close to the 2% goal.

When it comes to policy, we need to assess the broad range of possible outcomes.

We must watch carefully to see whether the economy is evolving with our expectations and adapt accordingly.

Market Reaction

Following Powell's statement about being on track to start tapering and complete by mid-2022, the DXY saw some movement towards the upside.