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federal Reserve officials were concerned last month that disrupted supply chain Were take risks more persistent inflation as he strengthened plans reduce their bond-buying incentive program next month And finish it by the middle of next year.

Minutes of their 21-22 Fed meetinghandjob issued on Wednesday, amid signs that revealed a strong consensus on scaling back $120 billion in monthly purchases of Treasury and mortgage securities high inflation And strong demand May demand tougher monetary policy next year. Bond purchases have been a key part of the Fed’s effort to stimulate growth since the coronavirus pandemic disrupted the US economy last year.

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Under the plans discussed last month, the Fed would reduce its purchases by $15 billion a month, split proportionally between Treasury and mortgage bonds. Officials discussed starting the taper in mid-November; If they follow the schedule set last month, the purchase will end by June.

The program to phase out the Fed’s stimulus program is somewhat faster than investors expected a few months ago. This partly reflects that this year’s rise in inflation has been longer than expected by central bank officials and private sector economists.

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Officials do not want to be in a position where they feel compelled to raise rates at a time when they are still promoting monetary incentives by buying assets.

Acceleration in inflation spreads through the economy

Minutes said many participants at last month’s meeting preferred to reduce purchases even faster. Those officials are eager to end their asset purchases to gain the flexibility to raise rates next year if needed, as they think inflation could run above the Fed’s 2% target.

fed Cut your short-term benchmark rate In March 2020, when the coronavirus pandemic hit the US economy, it reached near zero.

Officials debated last month when the Fed might need to lift rates to near zero. The minutes said an unspecified number of officials raised the prospect of a start raising rates by the end of next year as they expected labor markets and inflation to meet targets set by the Fed a year ago. Some of these officials thought that inflation would remain high until next year.

Another group was more optimistic that inflation would automatically hit the Fed’s 2% target. These officials thought the economy could guarantee rates remaining at or near their current setting for the next two years. These officials said raising rates too quickly and too quickly could undermine the Fed’s recent commitments. prevent inflation from falling below its 2% target.

new estimates released Half of the 18 officials who attended at the end of last month’s meeting expected the economy to need an interest rate hike by the end of 2022.

Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December have produced a recovery like no one in recent memory. Inflation has soared this year, with so-called core prices, which using the Fed’s preferred gauge, pushed volatile food and energy categories to 3.6% in August from a year ago. largely reflects the benefits disrupted supply chain further reduction Hard work and material.

Why are Democrats being ‘dishonest’ about inflation?

A separate index of core inflation rose 4% in September from a year earlier, the Labor Department reported Wednesday, matching the year-over-year increase recorded in August. Since May, overall consumer inflation, measured on a year-on-year basis, has risen at the fastest pace in 13 years, according to the Labor Department.

Price pressure this year was initially concentrated in a few categories, including used cars and airfares, that could be traced directly to the reopening of the economy. Wednesday’s report saw some increase in prices. Growth in two categories – housing and restaurants – stood out because they more closely reflect the amount of sluggishness in the economy, or what economists refer to as “cyclically sensitive inflation.”

Fed employees’ forecasts prepared last month revised their inflation forecast higher, but bank economists still expected this year’s rise in inflation to prove tentative, the minutes said. That forecast called for inflation to fall slightly below the Fed’s 2% target next year, amid a sharp drop in import prices before returning to 2% by 2024.

“Employees interpreted recent inflation data to indicate that supply constraints were exerting a greater degree of upward pressure on prices than previously thought,” the minutes said. “It was also expected to take longer to resolve these supply constraints,” compared to the previous launch made in late July.

The minutes also indicated that employee economists pointed to a risk that future inflation expectations of households and businesses will “go significantly higher”, a dangerous development for central bank officials as they believe that inflation expectations will increase significantly. That such inflationary expectations play an important role. effecting real inflation.

Atlanta Fed Chairman Rafael Bostic said in public remarks Tuesday that it is time to stop describing recent high inflation as fleeting, which he called a “dirty word”. For emphasis, he dropped $1 in a glass jar labeled “transient” every time the word was used.

“It is becoming increasingly clear that this episode characterized by animated price pressures – primarily rapid and widespread supply-chain disruptions – will not be brief,” he said. “By this definition, forces are not transitory.”

During a general discussion on September 29, Fed Chairman Jerome Powell acknowledged that the Fed is facing a situation where haven’t encountered in a very long time, which has tensions between the central bank’s two objectives of low, stable inflation as well as high employment.

“Managing through that process over the next few years … is going to be very challenging because we have this hypothesis that inflation will be temporary. We think that’s right,” he said. “But we are concerned about underlying inflation expectations remaining stable, as they have so far.”

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Mr. Powell has often approached his job to try to establish the central bank’s policy stance on managing the risks of weaker-than-expected growth or stronger-than-expected growth. This means the Fed may change its setting not only because the economy weakens or strengthens, but also because the risks surrounding the outlook change.

William English, a former Fed economist, said, “Inflation numbers have been poor, and supply chain information is very poor. It looks less transitory and some of these supply chain difficulties will last for some time.” at Yale School of Management.

“The important question is, when does this start to undermine public sentiment that inflation will come back to 2%?” said Mr. English. “Inflation risks now look bigger than they did a few months ago.”

Fed Vice Chairman Richard Clarida said Tuesday that the Fed will need to raise interest rates if it sees evidence that households and businesses expect recent inflationary pressures to continue. “Monetary policy will react to that,” he said. “But that’s not the case at the moment.”

Uncertainty about the economic and policy outlook is still higher than normal as President Biden is yet to announce who will lead the central bank following the terms of Messrs. Powell and Clarida expire early next year.

This story first appeared in The Wall Street Journal