Fed says shortages of materials, hiring problems holding back recovery

WASHINGTON (Reuters) - Shortages of materials and "difficulties in hiring" are holding back the U.S. economic recovery from the coronavirus pandemic and have driven a "transitory" bout of inflation, the Federal Reserve said on Friday.

"Progress on vaccinations has led to a reopening of the economy and strong economic growth," the U.S. central bank said in its semiannual report to Congress on the state of the economy. However, "shortages of material inputs and difficulties in hiring have held down activity in a number of industries."

The report will be the subject of hearings in Congress next week, including testimony from Fed Chair Jerome Powell about the outlook for the economy, inflation, and the transition of monetary policy as the impact of the pandemic recedes.

The report released by the Fed on Friday is largely backward-looking, but it documents the central bank's view that the recovery remains on track as firms and families navigate a complicated economic reopening.

Prices have risen faster than expected, for example, and while the supply bottlenecks and other factors driving the price hikes are expected to ease over time, "upside risks to the inflation outlook in the near term have increased," the Fed said.

Hiring has also slowed for an unexpected reason: Companies want to bring on more employees, but not enough workers are ready to take those jobs as they cope with ongoing health and family concerns and can rely on continued federal unemployment benefits to help pay the bills.

"Many of these factors should have a diminishing effect on participation in the coming months," the Fed said, though the speed and strength of that labor market recovery also remains uncertain.

The central bank, however, said available data suggest "a further robust increase in demand" occurred from April through June.

"Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted," while the financial system remains "resilient," the Fed said.

(Reporting by Howard Schneider; Editing by Paul Simao)