Fed Chairman: Inflation Not a Threat Long-Term Despite Massive Balance Sheet

Jerome Powell, the chairman of the Federal Reserve, reported on the state of the economy at a Senatorial hearing held on June 16.

During the initial report on the state of the economy and the actions taken by the Fed in response to the Coronavirus crisis, the chairman listed all of the extraordinary measures adopted by the bank since March.

Part of that included an unprecedented expansion of the Fed’s balance sheet, which purchased securities on the market with newly created money as part of the practice of Quantitative Easing.

But the chairman was entirely optimistic about the prospects of inflation. He noted that in the short term, weak demand resulted in declines in prices of apparel, gasoline, air travel and other industries impacted by lockdowns. Due to this, “consumer price inflation has dropped noticeably in recent months,” he said.

He further added:

“Longer-term inflation expectations have remained fairly steady. As output stabilizes, and the recovery moves ahead, inflation should stabilize and gradually move back up over time. [...] Inflation is nevertheless likely to remain below our objective for some time.”

Balance sheet not a threat

Answering concerns from Senator Richard Shelby (R-AL) on the size of the balance sheet, Powell dismissed any resultant issue. “I don’t think that the balance sheet at anything like its current size presents any real threat to either inflation or financial stability,” he said.

He stressed that the balance sheet is only expanded just as much as it is necessary, without making it “any bigger than it needs to be.”

But he revealed that it is unlikely that the Fed’s balance sheet will be de-leveraged following the crisis:

“When the time comes, [like] what we did from 2014 to 2017, we just froze the size of the balance sheet, and as the economy grows, the balance sheet shrinks as a percentage of the economy.”

He explained that in the past, actively shrinking the balance sheet had effects on the economy, while a “passive” approach did not. 

Powell’s optimistic view contrasts with the opinion of many market experts, who believe the dollar may lose a significant portion of its value to inflation.

The remainder of the session largely focused on the perspective of employment after the crisis, as well as the recent decision to purchase corporate bonds, which some senators criticized as being unnecessary.