The oil and gas price spike and other commodity disruptions tied to the war in Ukraine could push already accelerating prices even higher, spelling trouble for consumer inflation expectations. Expectations can become self-fulfilling if shoppers and businesses come to expect inflation year after year and act accordingly.
“The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher,” Mr. Powell said.
Still, he noted that the job market was already very strong, which could help the economy withstand a period with more restrictive policy.
“By many measures, the labor market is extremely tight, significantly tighter than the very strong job market just before the pandemic,” Mr. Powell said. “Record numbers of people are quitting jobs each month, typically to take another job with higher pay.”
Fed officials are hoping that workers — who are in short supply — will go back into the job market in the coming months and years, helping to take pressure off employers. If that happens, it could help inflation to slow down as wage growth moderates.
“In a sense, it’s a great labor market,” Mr. Powell said — but not a sustainable one. He noted that “this is a labor market that’s out of balance, that really has an excess of demand over supply.”
Employees have gone back more slowly than forecasters expected, either because they retired early or because pandemic-tied issues like caregiving shortages are keeping them at home. Likewise, supply chain problems, like factory shutdowns and shipping snarls, have been slower to heal, in part because of repeated coronavirus outbreaks.
“It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain,” Mr. Powell said. “In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”
Talmon Joseph Smith contributed reporting.