Wednesday, December 8, 2021

Fed to begin slowing funding as inflation concerns rise

WASHINGTON (AP) – The Federal Reserve will begin dialing back the extraordinary stimulus it provided since the pandemic broke out last year, a response to an improved economy and growing concern that high inflation may now last longer than it was a few months ago. is likely to. .

In a statement Wednesday after its latest policy meeting, the Fed said it would keep interest rates near zero but would begin reducing monthly bond purchases by $120 billion in the coming weeks, up from $15 a month. Billion. The purpose of those purchases is to hedge long-term interest rates for borrowing and spending. With the economy recovering, it is no longer needed.

The Fed’s announcement comes against a backdrop of rising prices in the economy – in food, rent, heating oil, autos and other necessities – which have burdened households and become a political liability for the Biden administration and its Democratic allies in Congress .

At a news conference, President Jerome Powell acknowledged that “high inflation creates difficulties for individuals and families.” At the same time, he stressed that the unusual uncertainties caused by a brutal but brief recession and a sharply later strong recovery have made it difficult for the Fed to predict the direction of inflation and the economy as a whole.

“We are learning now that we need to be humble about what we know about this economy,” the Fed chairman said.

For this reason, Powell sees no reason for the Fed to raise its benchmark short-term rate from its ultra-low levels any time soon. That prime rate affects many consumer and business loans. Unless the impact of the delta variant on the economy is completely eliminated, he said, the job market is unlikely to fully recover and many supply chains will remain disrupted.

The central bank is in the process of withdrawing from efforts to boost the economy and tends to focus on rising inflation to encourage more hiring. Compared to a year earlier, prices jumped in September at the fastest pace in three decades. The Fed now faces the delicate task of shutting down its ultra-low-rate policies, which it hopes will slow inflation, do it so rapidly without weakening or even weakening the job market. That to cause another recession.

“The Fed clearly does not think that inflation is likely to remain at or near current levels, nor does it think the labor market is back to full employment,” said Eric Vinograd, an economist at Asset Manager AllianceBernstein. “They do not intend to raise interest rates unless they are convinced that inflation is too high, that inflation expectations have become uncontrollable or that the economy is at full employment.”

The central bank will slow its $80 billion in Treasury purchases to $10 billion a month and $40 billion in mortgage bonds to $5 billion in November and December and said similar cuts would be “likely to be appropriate”. Its statement said it would adjust the pace of the cuts “if warranted by a change in the economic outlook.” It suggested that the Fed may decide to accelerate its pullback in bond purchases if inflation worsens.

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If the momentum continues, bond buying will be completely phased out in June. At that point, the Fed may decide to raise its benchmark short-term interest rate, which affects many consumer and business loans. That would be much earlier than Fed officials last summer, when they collectively predicted that the first rate hike would not happen until the end of 2023.

Market traders now expect at least two rate hikes during 2022, according to the Chicago Mercantile Exchange’s FedWatch tool.

In recent public comments, Powell has acknowledged that inflation has persisted longer than expected and the risk of higher prices remains. The Fed’s latest statement said that officials still consider material and labor shortages as the main factors driving inflation. Powell suggested Wednesday that those factors will ease over time, though perhaps not until the middle of next year.

So far, the Fed chairman said, the recent wage gains that have gone to many Americans haven’t accelerated inflation — something that could happen if companies want to offset their higher labor costs by raising prices.

“We don’t see an increase in wages in trouble,” Powell said.

The economy has rapidly recovered from the slowdown of the pandemic, although growth and hiring declined in the July-September quarter, partly because a rise in Delta cases discouraged many people from traveling, shopping and eating out. Many economists say they are optimistic that job growth in October will be offset by the weak pace of September, with an increase in vaccinations and the disappearance of the delta wave. The October jobs report will be released on Friday.

Last week, the government reported that prices rose 4.4% in September from a year earlier – the fastest 12-month increase since 1991. Yet while inflation continues to heat up, the job market hasn’t fully recovered. The unemployment rate in September stood at 4.8%, up from the pre-pandemic 3.5% level. And about 5 million fewer people now have jobs than before the pandemic.

This puts Fed officials, especially Powell, in a bind: They want to keep their benchmark short-term interest rate at nearly zero, where it has been pegged since last March, to boost the economy and encourage more hiring. For. But they are facing mounting pressure, including from Republican lawmakers in Congress, to rein in rising prices, which are offset by the benefits many Americans are getting from recent wage increases.

The July-September period saw the biggest increase in wages and salaries in at least 20 years. It suggested that workers are increasingly being forced into higher wages from businesses that are desperate to fill an almost record number of open jobs. But the gains were largely offset by rising inflation.

The Fed meeting comes as Powell’s future as the Fed chair remains uncertain. President Joe Biden has yet to announce whether he will re-nominate Powell for another four-year term. Powell’s current term ends in early February, but past presidents have usually announced such decisions in late summer or early fall.

Nation World News Deskhttps://nationworldnews.com
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