Monday, November 29, 2021

US Fed to launch slow economic aid as inflation concerns rise

The Federal Reserve will begin dialing back the extraordinary economic aid it has provided since the pandemic broke out last year, a response to high inflation that is now likely to last longer than it was a few months ago.

In a statement Wednesday after its latest policy meeting, the Fed said it would begin reducing $15 billion a month in monthly bond purchases by $120 billion in the coming weeks, although it reserves the right to change that pace. 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 across the economy – in food, rent, heating oil, autos and other necessities – which have burdened households and became a political liability for the Biden administration and its Democratic allies in Congress. Is. .

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”. This suggests that the central bank may decide to accelerate its return to bond purchases if inflation worsens.

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.

Changing expectations reflect a central bank that is increasingly shifting from attempting to boost the economy and encouraging more recruitment to one that is more focused on rising inflation. Compared to a year earlier, prices jumped in September at the fastest pace in three decades. The Fed is now faced with the delicate task of winding down its low-rate policies, which it hopes will slow inflation, without so sharply weakening the job market or even causing a drop. And to cause a recession.

At a news conference on Wednesday, Federal Reserve Chairman Jerome Powell stressed that the outlook for inflation looks highly uncertain, limiting the Fed’s ability to formulate its policies in response. He suggested that inflation should slow down sometime next year as supply constraints ease but the Fed cannot be certain it will.

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In its statement, the Fed slightly changed its long-standing language on inflation to raise the possibility that higher prices could prove long-lasting. Earlier, it said inflation was “advanced, largely reflecting temporary factors,” particularly supply constraints as the economy rapidly recovered from the slowdown. Now, it says, the increased inflation largely reflects “factors that are expected to be temporary.”

The change echoes recent changes in Powell’s public remarks, in which he acknowledged that inflation has persisted longer than expected and that the risks of higher inflation remain.
At the same time, the Fed’s latest statement suggested that officials still believe material and labor shortages are key factors driving inflation, factors that will subside over time.

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 hopeful that job growth in October will be offset by a weak September pace, 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. And large wage increases could further exacerbate inflation if companies raise prices to cover their higher costs.

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This article is republished from – Voa News – Read the – original article.

Nation World News Deskhttps://nationworldnews.com
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