Wednesday, August 17

The Fed faces a contest between supply, demand and “patience”

Federal Reserve (FED) authorities face a test of their ability to ignore high inflation and are now navigating their own feelings of patience and risk, amid an American economy held back by supply chain problems, slow hiring and strong consumer demand.

The combination of supply bottlenecks and rising household incomes, Driven by government aid related to the pandemic, it made the price index of personal consumption expenditures, A key measure of inflation, it will hit its highest level in 30 years in year-on-year terms in August.

Policy makers continue to hope that the rate of price increase will slow without the Fed boosts the process by raising interest rates earlier and more than expected.

However, that judgment now depends on a career.

Will disruptions, such as the 100-ship jam at the Los Angeles-Long Beach port complex in California, go away? before households run out of excess savings estimated at $ 2 trillion accumulated during the pandemic? Will that happen before recent price hikes show up in public expectations about future inflation?

The latter may already be beginning. An index of inflation expectations from the Fed, followed by senior officials from the US central bank, has risen for five consecutive quarters, something unprecedented.

Bond markets, which also anticipate higher inflation, are pricing in a higher start early and a more aggressive pace of interest rate hikes from the Fed.

“At first, it was easy to be patient,” Fed Governor Randal Quarles said last week. “The fundamental dilemma we face (…) is the following: Demand, increased by an unprecedented fiscal stimulus, has outpaced supply that suffers temporary interruptions.”

Nevertheless, the “fundamental capacity” of the economy remains intact, and Fed officials want to keep interest rates low as long as possible to let jobs rise.

“Restricting demand now, to bring it into line with a temporarily interrupted supply, would be premature”Quarles said, but “my attention is beginning to focus more fully … on whether inflation starts to decline.”

“Tension” in the air

The Fed holds a monetary policy meeting next week and is expected to announce its plans to phase out its $ 120 billion. in monthly asset purchases by mid-2022. Between now and next summer, the trajectory of inflation, inflation expectations and job growth will determine whether the central bank accelerates the date to raise its target interest rate from the current level close to zero.

A year ago, before the arrival of COVID-19 vaccines and at the beginning of a devastating wave of infections, the prospect of rising credit costs seemed distant. Only four officials of the Fed’s monetary policy anticipated the need to raise rates before 2024.

Nowmidway through the 18 authorities forecast a rise in 2022, a move that would occur as Joe Biden’s administration is funding new spending and probably before employment has returned to pre-pandemic levels. This could complicate efforts by Democrats to maintain control of Congress in the November 8, 2022 election.

Fed Chairman Jerome Powell He has pointed to the emerging “tension” between the central bank’s employment and inflation targets.

Voice of America (VOA)