Attention Turns to Rate as Fed Prepares to Slow Support

Federal Reserve chairman Jerome H. Powell is on the verge of achieving what would have looked like a victory a year ago: Central bankers are expected to unveil a plan Wednesday to steer the economy away from asset-buying programs. markets, a precision maneuver that is by no means guaranteed.

Instead, Mr. Powell and his colleagues are faced with pressing questions about their next steps.

Inflation running at top speed roughly thirty yearsand hopes that the jump in prices will quickly fade as supply chain bottlenecks deepen and fuel costs rise. Wages are rising rapidly, and consumers and businesses coming to wait faster price increases increase the risk that higher inflation will stabilize as employers and workers adjust their behavior.

While the Fed is expected to announce it will slow down its $120 billion monthly asset purchases to support the economy this week, Wall Street economists have already turned their attention to how worried the central bank is about brisk inflation and hyperinflation. whether – and when – to begin raising interest rates in response.

“The question on the market’s mind is what will happen next 100 percent,” said Roberto Perli, a former Fed economist who heads global policy at Cornerstone Macro.

Slower bond buying could lead to slightly higher long-term borrowing costs and reduce pressure on the economy on the margin. However, raising interest rates will likely have a stronger effect when it comes to cooling the economy. A higher federal funds rate will increase the cost of purchasing a car, a home, or a piece of equipment and slow down consumer and business demand. This could reduce price increases by allowing supply to catch up with spending, but it will slow growth and force hiring in the process.

The Fed has signaled that bond buying could end completely by the middle of next year. Economists increasingly expect the Fed to raise the policy rate as soon as next summer, from the near-zero level it has held since March 2020.

Goldman Sachs economists are now expecting a rate hike to arrive in July 2022, exactly one year earlier than they had previously predicted. Deutsche Bank recently lowered its forecast to December 2022. Investors as a whole are now giving a rate hike better than 50 percent at the Fed’s June 2022 meeting. CME Group tool This follows market pricing.

But raising interest rates poses a risky tradeoff for Fed policymakers. If inflation moderates as the economy returns to normal and the disruptions associated with the pandemic improve, higher borrowing costs could employ fewer people for no reason. And with fewer paychecks coming out each month, demand will likely weaken in the long run, which drag inflation back to the disturbing lows that reigned before the start of the pandemic.

“The risk is not about starting rate hikes back of the curve,” said Skanda Amarnath, managing director of Employ America, a group focused on promoting policies that help the workforce. “The risk is that the Fed will overreact to that.”

Renaissance Macro’s head of US economy, Neil Dutta, said that the fact that markets write rate increases more quickly may show that they are optimistic about the economy’s chances. Before raising interest rates, the Fed said it would like to see the economy return to full employment and inflation exceeding its 2 percent target and move towards the average over time. Investors may think that these targets will be reached in the middle of next year.

“If it’s a problem, why aren’t stocks going down?” Mr Dutta said earlier expectations for rate increases. “The economy is doing better than expected”

Still, millions of jobs remain missing in the labor market and job growth has slowed sharply. The payrolls have been expanded with only 194,000 jobs While new hiring data, due Friday, is expected to show companies added 450,000 workers in October, the trajectory is uncertain.

If workers take a long time to return to the job market, either because they lack childcare or fear catching the coronavirus, the Fed may find itself in a dilemma where inflation is high but full employment is difficult. Mr. Powell signaled that such a situation, where the Fed’s goals conflict, is a risk. But he also said the economy wasn’t there yet.

“I think it’s time to slim down,” said Mr. Powell. one last virtual conference. “I don’t think it’s time to raise rates,” he said.

This patience sets the Fed apart from some of its global counterparts. NS bank of england While inflation is rising in many advanced economies, it is on the verge of raising interest rates, making it the first major central bank. Although they are not that far away, Bank of Canada and Australian Reserve Bank they also begin to distance themselves from stimuli.

The Fed decision came at a complicated political moment, as Mr. Powell’s future was at stake. The Biden administration is debating whether to retain the Fed chair when his term expires early next year, and also debates who should serve as the vice president and central bank’s vice president for bank oversight.

Secretary of the Treasury Janet L. Yellen, told Reuters He said a decision would come “reasonably soon” and told CNBC he had advised Mr. Biden to choose someone suitable. experienced and reliableand praised Mr. Powell to him.

Whoever runs the Fed in 2022 will have their job cut out for them. Fed’s preferred gauge of inflation rises 4.4 percent In the period to September, unusually strong price pressures are likely to persist into next year, more than double the central bank’s annual target, and as airfare recovers, rents soar, sofas and used cars are still hard to come by.

“If we see signs of relief on the supply side, it will leave the Fed alone to continue guiding that the end of contraction won’t mean the start of price hikes,” said Michelle Meyer, chief US economist at Bank of America and colleagues. He wrote in a final analysis.

But if supply-side constraints and high inflation persist, wage inflation rises and inflation expectations continue to rise, the Fed will need to raise it sooner.”