“Inflation has been more persistent and higher than we’ve expected,” Powell told a hearing before the House Financial Services Committee on Wednesday.
“We understood demand would be strong,” Powell said. “We didn’t understand [the] significant problems of the supply side.”
Powell also said the Federal Reserve cannot be sure that price increases will slow in the second half of next year as many economists expect.
“The point is, we can’t act as if we’re sure of that,” he said. “We’re not at all sure of that.”
They both said considerable fiscal and monetary stimulus had a role in stoking the higher demand that fueled inflation, however, they described it as a challenging side-effect of an otherwise fast recovery.
“Inflation is a matter of demand, and it’s certainly true that the American Rescue Plan put money in people’s pockets, helped them meet expenses that they had, and contributed to strong demand in the US economy,” Yellen said, in a reference to the $1.9 trillion stimulus bill President Joe Biden signed in March.
“But if you look at the amount of inflation that we have and its causes, [the stimulus bill] is, at most, a small contributor,” she continued. “It’s enabled their spending, but the fact that their spending — because of the pandemic — has been so focused on goods as opposed to services has contributed massively to the supply chain problems.”
There has been a sharp rise in prices for a wide range of consumer goods this year as manufacturers, shipping companies, suppliers and retailers are finding it hard to keep up with demand amid a minefield of pandemic-related constraints.
Republicans put most of the blame for high inflation on the Biden administration, although the Fed, not Treasury, is primarily responsible for keeping prices stable.
“It is the administration’s agenda that is driving up the cost of things. It’s making the American people worse off, not better off,” said Rep. Patrick McHenry (N.C.), ranking Republican on the Financial Services panel.
Republican lawmakers have also tried to tie Biden to increasing prices ahead of the midterm elections as the party seeks to recapture the House and Senate.
Yellen, however, defended the administration’s stimulus efforts, noting it was “extremely hard” for policymakers to know just how much stimulus the country would need in order to be able to overcome the blow of the pandemic.