Washington , Chair Jerome Powell said Tuesday that the Federal Reserve would consider acting more quickly to dial back its ultra-low-interest rate policies to combat high inflation, which Powell acknowledged was expected next year. Well will continue.
The Fed has started reducing its monthly bond purchases, aimed at lowering long-term borrowing costs, which will end those purchases in June. But Powell clarified that Fed officials will discuss completing those purchases more quickly at the next meeting in mid-December.
Doing so would put the Fed on its way to begin raising its key short-term rate as early as the first half of next year. A higher Fed rate will, in turn, raise the cost of borrowing for mortgages, credit cards and some business loans.
“The economy is very strong and inflationary pressures are high,” Powell said at the Senate Banking Committee hearing. “So it’s reasonable, in my view, to consider completing the taper of our property purchase … maybe a few months earlier.”
Powell said the Fed should learn more about the potential economic impact of the Omicron version of the coronavirus in time for that next meeting. But he suggested that for now, Omicron is not included in the Fed’s economic outlook.
Stock prices fell after Powell’s comments, with the Dow Jones Industrial Average down about 1.5% in mid-day trading. Many investors expected Powell to signal that the Fed would defer any policy changes until the impact of the O’Micron version became clear. Instead, he suggested that the Fed has taken a decisive turn in reducing its economic stimulus.
The emergence of a potentially dangerous new COVID-19 variant could make Powell’s job harder and more complicated next year. If Omicron leads another wave of factory and port shutdowns in the United States and abroad and reverses back-to-office returns for many workers, Americans could spend heavily on goods such as furniture, equipment and cars. Huh. This trend could worsen supply constraints and push prices even higher.
Also, the variant may renew the fear among many workers of getting infected at work. There could be more resignations at a time when the job loss rate is already at record highs, leading to a labor shortage. This will threaten the weakening of the job market and the economy. In such a scenario, the Fed’s twin orders of stable prices and maximum employment could come into conflict.
Powell indicated these trends in his testimony before the committee.
“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” he said. “Greater concern about the virus could reduce people’s willingness to work individually, which would slow progress in the labor market and accelerate supply-chain disruptions.”
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Under criticism from some Senate Republicans about worsening consumer inflation, which hit a three-decade high last month, Powell acknowledged that price hikes have been worse than the Fed expected and was initially thought by policymakers. Will last longer than gone. As a result, he said, the term “transient” no longer serves as a description of inflation.
“It’s probably a good time to retire that word and try to explain more clearly what we mean,” he said.
Powell’s remarks have been followed in recent weeks by other Fed officials that the central bank should consider closing its ultra-low interest rate policies more quickly than it currently plans. He cited concerns about inflation, which has hit a three-decade high.
Treasury Secretary Janet Yellen also testified before a Senate banking panel and urged Congress to raise the country’s borrowing limits. Yellen previously warned that without an increase in the debt limit, the US government could default on its debt obligations for the first time since December 15.
“I cannot overstate how important it is that Congress addresses this issue,” Yellen said. “America must pay its bills on time and in full. If we don’t, we will end our current collection.”
Congress is expected to address the borrowing limit and also face a Friday deadline to provide enough money to keep the federal government open.
Yellen also said that for now, the economic recovery “remains strong” but urged that Americans get vaccinated or get a booster shot to protect against the Omicron variant.
Powell acknowledged that inflation “puts a significant burden, especially on those who are not able to meet the high costs of essentials such as food, housing and transportation.”
He added that most economists expect inflation to ease over time as the supply crunch eases, but he added, “the factors that push inflation upwards will persist well into next year.” At a news conference last month, Powell said high inflation could continue into late summer.
At its last meeting on November 2-3, Fed policymakers agreed to begin reducing the central bank’s $120 billion in monthly bond purchases from $15 billion per month. With this, the purchase will end in June.
They buy bonds, an emergency measure that began last year aimed at holding long-term interest rates to encourage more borrowing and spending. The Fed pegged its short-term interest rate, which affects other borrowing costs for mortgages and credit cards, at nearly zero since last March, when COVID-19 first flared up.
Last week, the Fed released minutes from its November meeting, showing that some of the 17 Fed policymakers favored reducing bond purchases more quickly, especially if inflation worsens. This will give the Fed a chance to hike its benchmark rate in the first half of next year.
At the time, investors expected three rate hikes next year, but the prospect of multiple hikes has fallen sharply since the appearance of the new coronavirus version.