WASHINGTON (AP) – The Federal Reserve will begin cutting back on emergency economic assistance since the pandemic that erupted last year in response to high inflation that now looks set to last longer than a few months ago.
In a statement Wednesday following its last policy meeting, the Fed said it would begin cutting $ 120 billion in monthly bond purchases by $ 15 billion a month in the coming weeks, although it reserves the right to change that pace. These purchases were designed to hold down long-term interest rates in order to stimulate borrowing and spending. With the economic recovery, this is no longer necessary.
The Fed’s announcement came amid soaring prices in the economy – for food, rent, fuel oil, cars and other essentials – that have become a heavy burden on households and a political burden on the Biden administration and its Democratic allies in Congress.
The central bank will slow down its $ 80 billion in Treasury purchases by $ 10 billion a month and its $ 40 billion in $ 5 billion in mortgage bonds in November and December, and said similar cuts “would probably be appropriate” in the coming months. This suggests that the central bank may decide to accelerate the pullback of bond purchases if inflation worsens.
If the pace continues, bond purchases will stop altogether in June. At this point, the Fed may decide to raise the base short-term interest rate, which affects many consumer and business loans. This will happen much earlier than Fed officials assumed last summer, when they collectively predicted that the first rate hike would not occur until late 2023.
According to the FedWatch tool of the Chicago Mercantile Exchange, market traders now expect at least two rate hikes in 2022.
The evolving expectations reflect the central bank’s rapid shift from efforts to stimulate the economy and encourage hiring to a bank increasingly focused on rising inflation. Prices jumped in September from a year earlier at the fastest pace in three decades. The Fed now faces the delicate task of rolling back its low-interest rate policy, which it hopes will slow inflation down without doing so fast enough to weaken the labor market or even trigger another recession.
At a press conference on Wednesday, Chairman Jerome Powell stressed that the outlook for inflation looks very uncertain, limiting the Fed’s ability to adapt its policies in response. He suggested that inflation should slow down sometime next year as supply problems diminish, but the Fed cannot be sure that this will happen.
In a statement, the Fed changed its long-standing inflation language slightly to raise the likelihood that high prices could be long-term. Earlier it was reported that inflation is “elevated, which largely reflects the transition factors”, in particular the supply shortage, as the economy quickly recovered from the recession. It says the increased inflation largely reflects “factors that are expected to be temporary.”
The change echoes recent shifts in Powell’s public appearances, in which he acknowledged that inflation has lasted longer than expected and that the risks of higher inflation persist.
At the same time, the Fed’s latest statement said that officials continue to view material and labor shortages as the main drivers of inflation – factors that are likely to subside over time.
“The imbalance in supply and demand associated with the pandemic and the economic recovery,” the statement said, “has contributed to significant price increases in some sectors.”
The economy is recovering steadily from the pandemic recession, although growth and hiring slowed between July and September in part as the rise in delta cases has pushed many people away from travel, shopping and eating out.
Many economists hope that with more vaccinations and delta wave attenuation, job growth in October will pick up faster than September’s weak pace. The October employment report will be released on Friday.
Last week, the government reported that prices rose 4.4% in September from last year, the fastest rise in 12 months since 1991. However, while inflation is gaining momentum, the labor market has not returned to full strength. The unemployment rate in September was 4.8%, higher than its pre-pandemic level of 3.5%. And now there are about 5 million fewer jobs than before the pandemic.
This puts Fed officials, especially Powell, in a quandary: they may want to keep their base short-term interest rate near zero, where it has been pegged since last March, to stimulate the economy and stimulate an increase in the number of employees. But they face growing pressure, including from Republican lawmakers in Congress, to curb price increases that are offsetting much of the benefits many Americans have received from recent wage increases.
Wages have grown between July and September the most in the last 20 years. This suggests that workers are increasingly able to demand higher wages from businesses that are desperate to fill near-record numbers of job openings. But this gain was largely offset by rising inflation. And a significant increase in wages could lead to further inflation if companies raise prices to cover their higher costs.
The Fed meeting comes as Powell’s future as Fed chairman remains uncertain. President Joe Biden has yet to announce whether he will reappoint Powell for another four-year term. Powell’s current term expires in early February, but previous presidents usually announced such decisions in late summer or early fall.
