Powell Talks Down Risk of Excess Supply

Q: Do you worry we are going to end up with excess supply immediately after the shortages, and if we continue this mismatch as we get out of the pandemic - how would that affect the Fed's outlook?

• A: That is really not the problem we are having now. Commodity industries are focused on that: they don't want to build capacity and then find out that it's not necessary. The problem now is that demand is very strong, incomes are high, people have money in bank accounts.
• Demand for goods is extremely high and it hasn't come down. We are seeing the service sector reopening and so prices are moving back up off their lows there. But re overcorrecting, there is a possibility on the other side of this that inflation could actually be quite low going forward. But that is not where our focus is right now. Our expectation is that these high inflation readings that we are seeing now will start to abate and that is what we think. [Cites lumber, used cars, airplane tickets, hotels], we expect that those prices will get back up to where they were, but there is no reason to think that they are going to keep going up a lot, because if they are, people will build new hotels.
• There is no reason for supply and demand to be out of whack in the hotel business over any period of time. We think that will happen.- Re timing and effects on inflation in the near term, there is a lot of uncertainty. The overall story is one that we think is right and we think the incoming data support it, and so do many forecasters. If you look at the SEP forecasts, you will see that.
• But we don't in any way dismiss the chance that it can work out that this goes on longer than expected. The risk would be that over time, it does begin to affect inflation expectations. If we see inflation expectations and inflation or inflation moving up in a way that is really materially above what we would see as consistent with our goals, and persistently so, we wouldn't hesitate to use our tools to address that.
• We do not expect that though, it is not our base case. We are joined by many other forecasters, but there is a lot to be humble about among forecasters, forecasters have a lot to be humble about. It is a highly uncertain business. We are very much attuned to the risks and watching the data carefully. In the meantime, there is so much uncertainty around this. It a unique situation that we need to see how things evolve in coming months, and see how that story holds up, and act accordingly.