Federal Reserve Chairman Jerome Powell said that inflation could temporarily rise as the U.S. economy recovers from the coronavirus pandemic, but said policymakers are committed to preventing a "substantial" overshoot.
In a five-page letter to Sen. Rick Scott, Powell said the U.S. central bank expects the increase in prices to be transitory, driven by a spending rebound as the economy reopens and a potential bottleneck that could limit supplies.
"We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period," Powell said. The letter was in response to a March 24 request from the Florida Republican, who raised concerns about the inflation and the Fed's bond-buying program.
The Fed slashed interest rates to near-zero last month and committed to buying at least $120 billion a month in Treasury debt as it sought to stave off the economic pain triggered by the pandemic and subsequent stay-at-home orders.
In order for policymakers to raise interest rates from the 0% and 0.25% range, Powell has repeatedly said the economy would need to hit full employment and inflation would have to hit a sustainable level above 2%, the Fed's target range.
"If progress towards our employment and inflation objectives slows, we will maintain a highly accommodative stance for longer," Powell wrote in the letter. "Conversely, if progress turns out to be more rapid, adjustments to the stance of policy would likely occur sooner."
Most Fed policymakers don't expect to reach those targets for another couple of years; previous projections from the Fed's March policy-setting meeting show that policymakers expect rates to remain near zero through 2023. About seven of the 18 Fed officials at the meeting said they expect to start lifting rates in 2022 or 2023 -- an increase from December, when just five forecast a rate hike.
Officials also changed their projections to reflect an increase in the nation's GDP this year; they now anticipate real GDP to surge 6.5% this year, compared to an increase of 4.2% that they forecast in December. Fed policymakers forecast gains of 3.3% and 2.2% in 2022 and 2023 respectively.
"We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans," Powell wrote. "We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise."
Expectations for U.S. economic growth have surged after Democrats passed a $1.9 trillion coronavirus relief package in March, which included a third round of cash payments for most American adults. Congress has already approved $4 trillion in emergency aid spending, and President Biden is pushing for another multitrillion-dollar, multi-part tax and spending initiative.
More Americans are also getting vaccinated – more than 200 million people have received a shot, so far – allowing for businesses to gradually reverse coronavirus restrictions.