The pressure on Fed’s Powell is rising as inflation worsens

WASHINGTON (AP) – Federal Reserve Chairman Jerome Powell certainly expected to get some respite after taking the first step this month to call back the Fed’s emergency aid to the economy.

Just a week later, however, the government reported that consumer prices had risen over the previous 12 months, with the most in three decades. The rise in inflation has put pressure on consumers, posed a threat to the Biden administration and intensified the pressure on Powell to act.

Some economists – and some Fed officials – want the Fed to move faster to curb its ultra-low interest rate policies. Other politicians are in favor of a more patient approach to interest rates. The result is a division within the Fed that Powell is likely to have to settle, with potentially far-reaching consequences for the economy.

It all comes just as President Joe Biden is announcing whether he will offer Powell another four-year term as Fed chairman or instead nominate Lael Brainard, the leading alternative who is a member of the Fed’s board. Powell’s term as chairman expires in February.

The question of whether the Fed should act faster to withdraw the enormous aid it has injected into the economy to combat the pandemic recession highlights the extraordinarily delicate task ahead of the Fed as it seeks to curb inflation without slowing an economy, 4 million jobs are still missing. pre-pandemic levels.

The main source of disagreement at the central bank’s next meeting in December is likely to be whether to speed up the reduction or downsizing of its monthly bond purchases. The Fed bought $ 120 billion a month in government bonds and mortgage bonds from last summer, until Powell announced on November 3 that the Fed would scrap these purchases, which have been intended to lower long-term interest rates and encourage more borrowing and spending.

Powell said purchases will be reduced by $ 15 billion a month in November and December, which would complete them entirely in June. But the Fed did not commit to sticking to that pace; it ruled out the possibility of accelerating the withdrawal. Doing so would allow the Fed to raise its key short-term interest rate as early as the first half of 2022. A rate hike would, in turn, lead to higher consumer borrowing costs for things like mortgages and credit cards.

Jason Furman, a Harvard economist and former adviser to President Barack Obama, noted in an interview with reporters this week that the country’s unemployment has fallen faster than expected to a relatively low 4.6%, while consumer inflation has reached its highest level in 31 year with 6.2 per cent. Higher inflation lowers the effective cost of borrowing, making Fed policy even more supportive of growth – and potential inflation – than it was early in the pandemic.

All of these factors, Furman suggested, justify a faster tightening of the Fed’s low interest rate policy. He said the Fed should end the downsizing in March, plan to raise interest rates in the first half of next year and potentially do so three times in 2022, unless inflation falls back quickly.

“The problems in our economy,” Furman said, “are not enough shots, not enough throughput in ports. Buying assets and keeping interest rates low does not solve these problems.”

Some Fed politicians are pushing in a similar direction. They include James Bullard, president of the Federal Reserve Bank of St. Louis. Louis.

“It makes sense to try to move a little more hawkishly here and try to manage the inflation risk,” Bullard said in an interview this week on Bloomberg Television. (“Hawkish” refers to Fed policy makers who prioritize raising interest rates to fight inflation, while “pigeons” typically prefer to keep interest rates lower to encourage more growth and employment.)

Many economists have pushed up their schedule for an initial Fed rate hike. Goldman Sachs now predicts two rate hikes next year, almost a year earlier than their previous projections.

However, some Fed officials want to take a more patient approach so that the cut can continue through June and then take time to assess whether further rate hikes are needed.

Mary Daly, head of the San Francisco Fed, said this week that she understands the difficulties caused by high inflation, especially for people living on paychecks. In remarks to a business audience, she said she saw a woman at a Walgreen’s recently remove things from her shopping cart while checking out because they had become too expensive.

Still, Daly said she felt the Fed should continue its current downsizing pace through June, and then, provided the pandemic steadily loosens its grip on the economy, wait to get a clearer sense of whether inflation will slow.

“Should the current high inflation measurements and shortage of workers prove to be COVID-related and transient, higher interest rates would hamper growth, slow down the recovery in the labor market and unnecessarily equate millions of workers,” Daly warned.

Furman is in favor of a more hawkish approach because of the risk that inflation may be driven higher in the coming months by factors unrelated to the pandemic, such as higher rents and constant wage increases. Companies, in turn, can raise prices to offset the cost of higher wages.

Several dove-like economists counter that the main cause of inflation is not a general overheating of the economy, which is usually the reason why the Fed is tightening credit. This time, they say, the main factor has been a shift among consumers to spend heavily on items such as furniture, appliances and cars, as the pandemic has kept people at home longer and has limited spending on services such as flying, eating out and attending. movies and concerts.

Expenditure on goods has risen 15% since the pandemic, economists at Wells Fargo note. After the last recession, commodity consumption did not increase that much until eight years after the downturn began. The strong demand is clogging ports and overwhelming the freight trains and trucks that supply them.

Consumers are likely to shift some of these expenses back to services as the pandemic disappears, which could curb inflation, said Michael Pugliese, an economist at Wells Fargo.

Powell suggested that he think about this very issue during a press conference following the Fed’s recent meeting, when he said that consumers are likely to move some expenses back to services soon.

The debate intensifies as Biden approaches a decision on whether to reappoint Powell as Fed chairman. The president told reporters on Tuesday that he would announce his decision as soon as this week.

“With the grace of God and the goodwill of the neighbors, you will hear it in about four days,” he said.

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