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06-2022

Fed to accelerate withdrawal of subsidies as prices rise | AP News

WASHINGTON (AP) – Under Chair Jerome Powell, the Federal Reserve looks set to execute a sharp turn toward tighter interest rate policies this week, with inflation accelerating and unemployment falling faster than expected.

On Wednesday, the Fed will likely announce that it will double its monthly bond purchases at the rate that Powell outlined just six weeks ago. Those bond purchases are aimed at lowering longer-term rates, so lowering them more quickly — possibly by early spring — would reduce some of the economic support the Fed supplied after the pandemic last year.

Fed officials are also expected to raise their benchmark short-term rate, which has been pegged at near zero since March 2020, two or three times next year. Rate hikes will, in turn, increase a wide range of borrowing costs, including mortgages, credit cards and some business loans. Just three months ago, the Fed barely raised a rate in 2022.

The Fed’s strong pivot comes after consumer inflation hit a four-decade high in November, And it reflects a growing recognition among Powell and other policymakers. That the economy has not progressed the way he expected it to be a few months ago.

For much of 2021, he calculated that inflation would be “temporary” and was more concerned that unemployment might not fall fast enough. Yet substantial price increases have spread beyond such pandemic-disrupted industries as into auto, electronics and building material rentals, restaurant menus and medical care. Rising inflation has become a heavy burden for many American households, especially those struggling to afford food and fuel costs, and is a source of public discontent with President Joe Biden and Democrats in Congress.

Fed officials still expect inflation to calm down by the second half of next year. Yet they now expect a significant risk that higher prices will remain, That possibility was reinforced by a government report on Tuesday that wholesale inflation jumped 9.6% For the 12 months ending in November, the fastest year-over-year pace on 2010 records.

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

Powell said in Congressional testimony two weeks ago That the Fed will potentially reduce, or accelerate tapering, its bond purchases. Economists now expect the tapering to end by March instead of the previous timeline Powell had set in June. Doing so will allow the Fed to start raising rates early next year if it chooses to do so to fight inflation.

“Price hikes have become more widely spread in the economy in recent months, and I think the risk of higher inflation has increased,” Powell said at a Senate committee hearing on November 30.

The transition from ultra-low rates to stricter credit policies carries significant risks. Raising borrowing costs too quickly can hit consumer and business spending. In turn, this will weaken the economy and is likely to increase unemployment. Yet if the Fed waits too long to raise rates, inflation could spiral out of control. It may then have to act aggressively to strengthen credit and potentially trigger another recession.

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

“They are far behind the curve, they are simply taking their foot off the accelerator instead of applying pressure to the brakes,” said Paul Ashworth, chief US economist at consulting firm Capital Economics.

With consumer inflation high – it reached 6.8% in November compared to a year earlier, the highest since 1982 – inflation-adjusted rates, for example, are lower than they were a year ago, when the economy was in dire straits. was in Even when the Fed starts raising rates, Ashworth suggested, it probably won’t raise them to the point where higher rates will start to stall the economy any time soon.

Some economists expect inflation to remain Last month, nearly 7% annualized momentum was as high. Gas prices have reached their peak. Supply chain bottlenecks are gradually easing in some areas. And government stimulus payments, which helped drive inflation-driven spending, are unlikely to return.

Still, economists say inflation may not fall far enough or fast enough to preclude the need for a rate hike next year. Economists at Goldman Sachs have calculated that housing costs, including apartment rents and homeownership costs, which make up about a third of the Consumer Price Index, have been rising at a 5% annual pace over the past few months. Restaurant prices rose 5.8% in November from a year earlier, a nearly four-decade high, partly reflecting higher wage costs. Such hikes are likely to keep inflation above the Fed’s 2% target next year.

With those dynamics in mind, the Fed may also omit the word “transient” from the statement it released after each policy meeting on Wednesday. Powell said during a Senate hearing that it was time to “retire” that phrase, which has broadly meant that high inflation will prove to be just a temporary phenomenon.

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