The Fed has been debating whether to taper its stimulus program or continue through the end of 2014. If they do, it will mark a shift into less-stimulative monetary policy and many economists expect inflation rates to remain low.
The “inflation fed” is a term that refers to the inflation rate of the US Federal Reserve. The Fed has been preparing to taper stimulus amid more doubts on inflation.
Officials at the Federal Reserve plan to end their $120 billion-per-month bond-buying program in November, but uncertainties over how quickly inflation pressures may diminish are causing growing concern within the central bank.
This year, Fed Chairman Jerome Powell and other senior officials downplayed concerns that a price spike during the uneven epidemic recovery would result in persistently higher inflation. The most dramatic price rises have been linked to things most impacted by the closure and reopening of the economy, but there are indicators that inflation is spreading to a wider range of goods and services.
Officials have emphasized in recent weeks that they still believe inflation will fall on its own as supply-chain problems are ironed out. Recent public statements, on the other hand, demonstrate that they are no longer as adamant about their position as they once were.
For the time being, the Fed’s policy meeting on November 2-3 will be focused on turning the switch to begin decreasing, or tapering, asset purchases later in the month. Mr. Powell has won widespread support among officials for a proposal to wind down the government’s pandemic-era stimulus program by next June, cutting monthly purchases by $15 billion.
Officials don’t want to add to the monetary stimulus by buying assets whenever they believe the economy requires higher interest rates, therefore they want to finish the taper first.
“I do believe it is time to taper, but I do not believe it is time to increase rates,” Powell said last week during a virtual chat.
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Because of the increased concern about inflation developments, the taper design already reflects a speedier schedule. The Fed gave investors the notion earlier this year that it would begin reducing bond purchases in January and that the process would take almost a year.
Since December, approximately $2.8 trillion in federal expenditure has been authorized, resulting in a recovery unlike any other in recent memory. Using the Fed’s preferred metric, core prices, which exclude volatile food and energy categories, climbed 3.6 percent in August from the previous year.
The bond markets in the United States have begun to reflect expectations that the Federal Reserve would raise interest rates next year. According to CME Group’s tracking of futures market pricing, the chance of at least two rate hikes by the end of next year increased to 75% last week. That’s up from approximately a 20% chance at the end of the Fed’s meeting last month.
Mr. Powell did not contradict or confirm such forecasts on Friday, which might point to the Fed hiking rates for the first time in September. “Fundamentally, I believe our policy is sound. “I believe the market is aware of where we are and what is going on,” he added. “I’m not endorsing the price of every asset or anything like that.”
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While the taper is in effect, Fed policymakers will try to figure just how much the epidemic has affected labor markets and spending habits, and how quickly they will return.
The epidemic, for example, increased expenditure on products while decreasing demand for services. Officials at the Federal Reserve believe that the mix of expenditure will change, easing imbalances and inflation. However, if demand for products continues to rise, higher interest rates may be required to chill the economy.
Officials are also expected to continue debating how long they should wait for confirmation of when they believe price pressures would diminish on their own before telegraphing, if required, a move toward tighter money at their November meeting.
Mr. Powell said it was “frustrating” that supply-chain bottlenecks were not easing in congressional testimony last month. “Supply-side restrictions have really become worse in certain cases…and now we’re having upward pressure on energy,” he said at the virtual conference last Friday. “The dangers are now plainly longer and more persistent bottlenecks, and consequently greater inflation,” he said.
Mr. Powell’s statements reflected the most recent, steady shift in his assessment of the inflation forecast.
Mr. Powell explained why he expected price spikes will decrease in late August, stating that the epidemic would have a beginning, middle, and finish. As a result, any supply-demand mismatches caused by the epidemic would be alleviated, bringing inflation back to the Fed’s objective of 2%.
Mr. Powell outlined five points that he believes support his point of view. There were no broad-based inflationary pressures, and price rises for commodities that had suffered strong inflation this year, such as used vehicles and other durable goods, were likely to calm down. He said that the Fed’s forecast will be updated depending on “evidence that supports or refutes” that view.
Inflation data released in the last two months has weakened those two arguments marginally. In September, the Labor Department released an inflation report that indicated a widening of pricing pressures. Meanwhile, prices for several commodities that had looked to be leveling down this summer, such as secondhand vehicles, are once again climbing.
Officials at the Federal Reserve are weighing two risks. Because monetary policy has a lag in cooling demand, they don’t want to slow the economy at the same time as supply constraints have eased—for example, because more employees have returned to the workforce. This might result in unfavorably sluggish and inflationary development.
Mr. Powell said that raising rates “now with the impact and aim of reducing employment growth when there’s strong reason to expect…supply restrictions to lessen” would be premature.
The second concern is that firms and consumers may learn to anticipate greater prices in the future, even if Mr. Powell and his colleagues are eventually correct about prices of some items slowing. Officials call this “un-anchoring” of inflation expectations, and they’re looking for evidence of it in consumer surveys and market-based inflation compensation indicators.
“I believe we may have to reevaluate the pace with which we would be thinking about increasing interest rates if we’re still seeing 4 percent inflation or in that vicinity next spring,” Fed governor Randal Quarles said last week.
Supply constraints, according to Richmond Fed President Tom Barkin, have led buying managers at big retailers to prioritize a stable inventory of items above reduced pricing, possibly contributing to inflationary behavior. “Right now, if you’re dealing with Walmart, they simply want the supply.” Mr. Barkin said Friday, “That’s a tremendous shift from where they used to be.”
Some Fed members have also expressed concern that proposed spending measures in Congress may provide too much boost to the economy. Mr. Barkin said, “I don’t believe we need any additional demand stimulation right now.”
Nick Timiraos can be reached at nick.timiraos@wsj.com.
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