Powell, Yellen Discuss Persistent Inflation, Systemic Risk

Higher inflation rates “will likely remain so in the coming months,” Federal Reserve Chairman Jerome Powell acknowledged today in testimony before the Senate Banking Committee. He noted that the effects of inflation on the economy “have been larger and longer-lasting than anticipated,” but added that “they will abate,” and begin to fall back toward the Fed’s longer-run 2% target.

Powell attributed much of these upward pressures on prices to persistent supply chain issues, noting that “this is really a mismatch between demand and supply. We need those supply blockages to abate before inflation can come down.” Meanwhile, Treasury Secretary Janet Yellen expressed her view that inflation at year-end would be “probably closer to 4%. That already almost must be the case, based on what’s happened this year.”

Powell and Yellen also discussed what they view as the most significant risks to the economy beyond the COVID-19 pandemic. Powell flagged cyber risk as the most significant threat to the banking industry. “We have a very highly capitalized banking system, one that is much better at measuring its risks” and banks are “well-fortified” against losses from loan defaults, Powell said. “The risk we haven’t really faced the full brunt of yet is a successful cyberattack on a financial institution of some kind—be it a financial market utility, a bank or some other type of financial institution. . . . It’s a very high priority to be ready for it.”

Yellen added that “there are threats to financial stability that have come from growth of activity in the shadow banking sector,” many of which came to light during the pandemic, as well as climate related risks—both of which she said she is working to address in her role as head of the Financial Stability Oversight Council.