US Fed policy on hold for now but price concerns mounting

posted June 16, 2021 at 07:20 pm
by  AFP
WASHINGTON—The Federal Reserve is not expected to announce any changes when it concludes its two-day policy meeting on Wednesday, but could offer reassurances that it is keeping a watchful eye on rising prices.

US central bankers have made clear they will not alter monetary policy until they see lasting signs that employment and inflation have recovered from the unprecedented economic damage from the COVID-19 pandemic.

But that time may be approaching faster than previously expected, amid the accelerating reopening of the world’s largest economy, fueled by widespread vaccinations and huge amounts of government aid.

The Fed cut the benchmark lending rate to zero in March 2020, and has been buying $120 billion a month in bonds to provide liquidity to support the economy.

But rising prices have ignited worries that policymakers will have to pull back on that stimulus sooner or faster than expected, which could then slam the brakes on the economic rebound—which would damage President Joe Biden’s policy agenda.

Unemployment has dropped, but remains at 5.8 percent in May, while consumer and producer prices have surged to 5.0 and 6.6 percent, respectively.

Fed Chair Jerome Powell has hammered home the message that the price spikes are largely temporary, and in his press conference he likely will repeat that stance even while stressing the central bank is vigilant and will act if needed to contain inflation.

But some economists and analysts have been sounding the alarm.

“If the Fed’s monetary policy is truly data dependent, as the Fed says it is, it will acknowledge that the risks of a persistent rise in inflation have risen and that the prudent path of policy would be to move toward announcing that it will begin to taper” asset purchases, said Mickey Levy of Berenberg Capital Markets.

Members of the Fed’s policy-setting Federal Open Market Committee (FOMC) will offer updated economic projections, which are expected to reflect rising inflation and stronger growth, and will bring forward the date of the first expected increase in the key interest rate, possibly as soon as 2023.

The first step will be a tapering of the massive bond-buying program, and Powell could signal that officials will soon begin at least talking about the right timing, although most are expecting the real plan to emerge in August.

Krishna Guha of Evercore ISI said the Fed’s plan is working, and markets mostly accept that much of the rising prices are temporary giving them time to react.

Topics: Federal Reserve , monetary policy , COVID-19 pandemic
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