The Federal Reserve is turning hard from a patient approach to recovering support for the U.S. economy.
Fed officials on Wednesday charted a faster return from the unprecedented stimulus they placed at the start of the coronavirus pandemic than they originally planned. The bank’s policy -making committee announced that it intends to end its monthly purchase of Treasury and mortgage bonds in March, and expects to raise interest rates nearly threefold by the end of 2022.
The Fed is holding back stimulus cuts even as inflation rises for most of the year. Millions of workers have remained on the sideline for more than a year and officials are reluctant to reduce support, hoping that more Americans will return to work as the pandemic eases and the fiscal stimulus.
But Fed officials acknowledged they no longer had time to wait for a mass return to the labor market with inflation reaching its highest level in more than 40 years.
“The reality is we don’t yet have a strong recovery in worker participation, and we may not have it for some time,” Fed Chair Jerome PowellJerome PowellGet ready for a bigger -than -expected interest rate hike in 2022 The Hill’s Morning Report – Presented by Charter Communications – Dem wheels are shaking on BBB train; Fed rate hike in ’22 On The Money – Presented by Citi – Manchin stalemate leaves Biden’s bill on brink of collapse MORE said at a press conference on Wednesday following the December meeting of the Federal Open Market Committee (FOMC), which sets monetary policy.
“At the same time, we have to make policy now and inflation is well above target. So this is something we have to consider, ”he continued.
By reducing interest rates to nearly zero levels in March 2020, buying trillions of dollars in bonds, and deploying billions in emergency loans, the Fed has helped bolster a surprising strong recovery from the worst economic shock in a century. The unemployment rate dropped to 4.2 percent in November, growth is on track to exceed 5 percent, and layoffs have fallen to their lowest level in more than 50 years.
The Fed’s response – along with more than $ 5 trillion in fiscal stimulus and the breakthrough of mRNA coronavirus vaccines – is an important force behind a faster recovery than many economists expect.
However, the speed of that rebound outperformed supply chains with intense demand for goods and stimulated higher inflation. At the same time, the labor force participation rate remains 1.5 percentage points below its pre-pandemic level.
Usually after a big economic shock, “there aren’t enough jobs and people can’t find jobs and we’re stimulating demand and trying to get demand to come out. That’s not the problem here. The problem is a problem with supply side, ”Powell said Wednesday.
Consumer spending has risen to pre -pandemic levels, but remains disproportionately focused on products rather than on services and activities with more face -to -face exposure. As spending picks up in the face of the virus, manufacturers, suppliers, shipping companies and retailers continue to raise their prices while limited by port bottlenecks, shortages of raw materials and ingredients, and staffing issues with critical industry.
As inflation rises, the Fed faces growing pressure from Republican lawmakers and even some prominent Democrats, such as former Treasury Secretary Larry Summers, to stop the stimulus before the economy starts to heat up. But Powell and Fed officials urged patience in the face of what they call “transitional” inflation, insisting that supply chain snarls and the lag in pandemic -driven labor force participation will begin to ease.
“[The Fed] may be right if the supply side of the economy can respond faster and stronger, ”said Adam Ozimek, chief economist at Upwork, who warned in June that the bank could face pressure as stimulus-boosted demand ran against supply constraints.
“Clearly the fiscal stimulus has pushed demand faster than the economy can handle and kept it tilted towards the more inflationary goods sector,” he continued.
Powell, like many economists, acknowledges too underestimating how long pandemic -related supply issues will last and how high they will stimulate inflation.
Inflation measured by the Commerce Department’s personal consumption index without food and energy prices-the Fed’s preferred measure of price growth-rose 0.4 percent in October and 4.1 percent annually.
The median estimate by FOMC officials for year-end inflation rose to 4.4 percent, according to projections released on Wednesday, from an estimate of 3.7 percent in September.
“They’re clearly paying attention,” said Christopher Russo, a research fellow at George Mason University’s Mercatus Center, a libertarian-leaning think tank.
“Inflation has pretty clearly remained beyond what forecasters at the Fed and in the private sector and elsewhere, and so they are adapting to policy.”
Powell said Wednesday that while he hopes to reach labor market participation as federal unemployment benefits expire and schools reopen, the U.S. now faces risks from stimulating a fast-paced economy. rising against its highest potential during a pandemic.
The Fed chief said a September series of strong employment reports, large increases in incomes and steep rises in consumer prices had sparked concerns about rising inflation beyond the grasp of pandemic.
“The risk of higher inflation becoming entrenched has increased,” Powell said, adding that it’s “not high right now.”
“Part of the reason behind our move today is to put ourselves in a position to cope with that risk,” he continued.
After forcing Powell’s hand, pandemic persistence could still throw another wrench into the Fed’s pivot.
Economists are still unsure how the emergence of the omicron variant will affect the speed of recovery and inflation. Although the delta variant slowed job growth, particularly in the service sector industries, inflation rose sharply as consumers who cash-flushed returned to purchases of goods.
A steep drop in consumer activity caused by the coronavirus could lower inflationary pressure and allow the Fed to proceed more slowly. More supply chain snarls could push the Fed in the opposite direction.
“I’m not worried that the Fed will cause a recession. I’m worried that the Fed will slow things down,” Ozimek said.
“And after decades of the Fed leaning on slowing things down so much. I’m more worried about that. I think we need to hurry up and get back to full work.”