Q: Are we looking at a scenario next year of a slowing US economy with higher inflation?
Powell says the economy isn’t expected to have as much fiscal support in 2022, but growth is still seen meaningfully above the long-term potential economic outlook.
While inflation is seen lower than in 2021 [with core PCE forecast at between 1.7% to 2.5%]
Growth of, say, 3.5% after 7% growth in 2021 would be a great result, Powell insists, and mean significant job creation.
Q: But you’re forecasting a decelerating economy, is there a risk of stagflation?
Powell reiterates that growth will be higher than the long-run potential (estimated at 2%), so it should pull people into jobs, lift wages and encourage business investment.
But yes, there is a risk that inflation will be higher than the Fed expects, as it doesn’t have certainty over the timing or extent of the effects caused by reopening the economy.
But, the underlying forces around the globe that have been pushing inflation lower over a quarter of a century are intact – such as aging populations, low productivity, and globalisation.
So if inflation proves higher, or more persistent, the Fed will use its tools, he adds.