Federal Reserve Chair Jerome Powell’s tone was certainly on the dovish side in his semi-annual monetary policy testimony before Congress on Wednesday. With regards to inflation, he reiterated that although it had risen over the last few months, is likely to remain elevated, pressures will subside. He once again cited base effects, bottlenecks, and re-opening impacts. However, interestingly, he avoided using the word ‘transitory’, indeed, it was not included in his remarks at all yesterday. Maybe there is a subtle change to recent prepared remarks at the June FOMC press conference when he said, ‘As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal’. We will have to see.
At the same time Powell sounded optimistic that conditions in the labour market are improving, however, he was at pains to say that ‘there is still a long way to go’. He also pointed out again how the unemployment rate understates the shortfall in employment. ‘The unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labour market has not moved up from the low rates that have prevailed for most of the past year’ he said.
During the Q&A session, predictably, most questions were focused on recent increases in inflation. Powell acknowledged the recent strength in inflation, stating ‘Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy. The question will be, where does this leave us in six months or so when inflation as we expect does move down’. If inflation was to persist and was threatening to derail expectations, ‘we would absolutely change our policy as appropriate’ he said.
Lastly, on Tuesday we wrote about the roller coaster ride lumber prices have seen this year. To recap; Lumber prices, which at one point in May this year was up over 154% from its January lows, yesterday (Monday) closed at $685, wiping out all its astonishing gains for the year. At the start of the year lumber was trading at $873 (that is 110k board feet) before dropping to $668, however from that point it took off, topping out at over $1,700 before the collapse.
From that daily lumber is down another 23% !!