Fed to speed up economic aid withdrawal as prices soar


WASHINGTON (AP) – Under President Jerome Powell, the Federal Reserve is poised this week to make a sharp turn to tighter interest rate policies with accelerating inflation and falling unemployment faster than expected .

On Wednesday, the Fed will likely announce that it will cut its monthly bond purchases to double the rate Powell indicated just six weeks ago. These bond purchases are meant to lower long-term rates, so cutting them faster – likely in early spring – will reduce some of the economic assistance provided by the Fed after the outbreak of the pandemic the last year.

Fed officials should also expect they will hike their short-term benchmark rate, which has been close to zero since March 2020, two or three times next year. The rate hikes would in turn increase a wide range of borrowing costs, including for mortgages, credit cards and some business loans. Just three months ago, the Fed barely forecast a rate hike in 2022.

The Fed’s hard pivot comes after consumer inflation hit a four-decade high in November, and this reflects growing recognition among Powell and other policymakers that the economy has not grown as they did. foresaw it just a few months ago.

For much of 2021, they had calculated that inflation would be “transient” and were more concerned that unemployment would drop quickly enough. Yet substantial price increases have spread beyond industries disrupted by the pandemic like automobiles, electronics and building materials into rents, restaurant menus and medical care. Rising inflation has become a heavy burden on many American households, especially those struggling to afford food and fuel costs, and a source of public discontent with President Joe Biden and the Democrats. in Congress.

Fed officials still expect inflation to slow down by the second half of next year. However, they now foresee a significant risk of persistently high prices. That likelihood was bolstered on Tuesday by a government report that said wholesale inflation jumped 9.6% for the 12 months ending in November, the fastest year-over-year pace on records dating from 2010.

The unemployment rate has also fallen rapidly since Fed policymakers last met in early November – from 4.8% to 4.2% – a sign the economy is strong and is approaching the bottom line. maximum employment, one of the two mandates of the Fed with price stability.

Powell said in testimony to Congress two weeks ago that the Fed would likely step up, or shrink, its bond purchases. Economists now expect the reduction to end by March, instead of the previous timeline Powell set in June. This will allow the Fed to start raising rates earlier next year if it chooses to do so to fight inflation.

“Price increases have spread much more widely over the last (more) months in the economy, and I think the risk of higher inflation has increased,” Powell said at a hearing of a Senate committee on November 30.

The shift from ultra-low rates to tighter credit policies comes with significant risks. Rising borrowing costs too quickly could stifle consumer and business spending. This, in turn, would weaken the economy and likely increase unemployment. Yet if the Fed waits too long to raise rates, inflation could get out of hand. He may then have to act aggressively to tighten credit and potentially trigger another recession.

For now, some economists say the Fed is unlikely to hurt the economy anytime soon, even if it quickly reverses its efforts to boost growth.

“They are so late that they are just taking their foot off the accelerator, rather than stepping on the brake,” said Paul Ashworth, chief US economist for Capital Economics, a consultancy firm.

With consumer inflation high – it hit 6.8% in November from a year ago, the highest since 1982 – inflation-adjusted rates are lower than they were, for example, a year ago, when the economy was in much worse shape. Even when the Fed does start raising rates, Ashworth suggested, it probably won’t raise them to a point where higher rates start to constrict the economy anytime soon.

Few economists expect inflation to stay as high as the annual rate of nearly 7% reached last month. Gas prices are already out of their peaks. Supply chain bottlenecks in some regions are gradually easing. And the government’s stimulus payments, which helped spur higher spending that boosted inflation, are not expected to return.

Still, economists say inflation is unlikely to fall far enough or quickly enough on its own to prevent the need for rate hikes next year. Housing costs, including apartment rents and the cost of ownership, which account for about a third of the consumer price index, have increased at an annual rate of 5% in recent months, calculated Goldman Sachs economists. Restaurant prices jumped 5.8% in November from a year ago, a high of nearly four decades, partly reflecting rising labor costs. Such increases will likely keep inflation above the Fed’s 2% target next year.

Given this dynamic, the Fed may also remove the word “transitional” from the statement it issues after every policy meeting on Wednesday. Powell told the Senate hearing it was time to “withdraw” that phrase, which had been widely interpreted to mean that high inflation would turn out to be only a temporary phenomenon.


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