Faced with price spikes, the Fed will turn to act quickly to deal with inflation

Faced with price spikes, the Fed will turn to act quickly to deal with inflation



If Jay Powell needs further evidence to support the Fed’s reason to scale back its massive stimulus plan more quickly, he confirmed this in the November inflation report released on Friday, which showed that consumer prices are at the fastest annual rate in nearly 40 years. The speed is up. .

The November consumer price index rose 6.8% from the same period last year, dispelling any doubts about continued price pressures to be broad-based.

Even before the latest inflation data was released, the Fed had changed its strategy and suddenly changed its strategy from Patient approach Reduce the central bank’s ultra-loose monetary policy instead of assuming more Radical position Fight against inflation. After this, the Fed appears to be expected to advance its plan.

Powell laid the foundation earlier this month, emphasizing that there is a high degree of uncertainty about when inflation will ease next year.

He also vowed to use the Fed’s tools to ensure that inflation does not become entrenched-he supported this promise by suggesting that the central bank “may be a few months earlier than the original June timetable” to end asset purchases.Economist now Expected The Fed will double the pace of reduction and stop expanding the scale of its balance sheet in March, laying the foundation for a series of interest rate hikes in 2022.

“The Fed’s communication is very clear: they will speed up the downsizing in order to open the door for interest rate hikes next year,” said Anne Beaudu, Amundi’s global fixed-income portfolio manager.

Powell’s turn came only four weeks after the Fed first announced that it would begin to reduce or “shrink” its pandemic support.

During this period, a series of strong data were released, including a strong October employment report and upward revisions to August and September gains. Inflation data showed that obvious price pressures are increasing, sparking further discussion, and additional evidence also underscores the strength of American consumers.

“Part of the art of monetary policy is never too deep or too love for your previous position. You have to adjust your position as the actual situation changes,” said David Wilcox, a member of Peterson International Economics Institute and Bloomberg Economics Institute, worked at the Federal Reserve. “The fact that they responded to the ever-changing evidence in a wise manner is exactly how monetary policy should work.”

Economists expect the Fed to change its wording around inflation and formally delete “temporary” from the statement. It will also release new insights on the possible way forward for interest rates.

Animated dot chart showing the Fed’s forecast over time

September-Last update of the so-called “dot plot” of personal interest rate forecasts-Federal Reserve officials Divide equally Regarding the prospect of raising interest rates next year.

Cleveland Federal Reserve Chairman Loretta Mester (Loretta Mester) is a voting member of the Federal Open Market Committee that sets policy in 2022. Tell The Financial Times believed earlier this month that two interest rate hikes next year may now be “appropriate”, and James Brad of the St. Louis Fed also supports this pace.

Economists at Bank of America predict that the dot plot will show two interest rate hikes in 2022 and six interest rate hikes in 2023 and 2024. Michael Feroli, chief US economist at JPMorgan Chase, said that the Fed may speed up and raise interest rates once every year.

The Fed will also release personal forecasts of inflation, unemployment and economic growth. The median forecast for September shows that this year’s core inflation indicator will stabilize at 3.7%, and then drop to 2.3% in 2022. Currently hovering at 4.2%, some economists expect the 2022 forecast to be close to 3%.

The unemployment rate is 4.2%, which is already below the Fed’s median forecast of 4.8% in 2021, and is gradually approaching the 2022 threshold of 3.8%. Aneta Markowska, an economist at Jefferies, expects the unemployment rate to fall further. It is expected that the unemployment rate will fall to 3.5% next year and 3.4% the following year.

Although the background has improved, many economists point out Uneven The nature of the labor market recovery and the persistent risks posed by Covid—especially considering the new variants—and advise the Fed not to deviate too far from its patient approach.

William Spriggs, Howard University economist and AFL-CIO’s William Spriggs said: “If we have a much smaller labor force and you lock it in, you lock in a permanently smaller economy. “Vacant seats on the Federal Reserve Board of Governors.

He also said that raising interest rates will not help solve the inflation problem at hand.

“You can’t use demand shock tools to control supply shocks,” he added. “If your idea is to try to increase the cost of capital and result in more savings and less investment, that is not your way out of this situation.”

Alan Detmeister, an economist at UBS and a former Fed staff member, added that raising interest rates prematurely could slow down hiring and cast a shadow over employment prospects.

Megan Green, chief global economist at the Kroll Institute, is also one of those who urged caution, especially because the effects of changes in monetary policy will take time to take effect.

“By definition, the central bank needs to be more like a tanker than a Lamborghini,” she said. “This transition of the Fed feels very much like Lamborghini.”


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