Fed hones inflation-fighting tools ahead of rate hikes | Money


A view shows an eagle sculpture on the Federal Reserve building, on the day it will release the August 1, 2012 Federal Open Market Committee minutes, in Washington August 22, 2012. – Reuters pic

WASHINGTON, Jan. 23 — The Federal Reserve has its inflation-fighting weapons ready to fire, and when the U.S. central bank‘s policy committee meets next week, the focus won’t be on whether to ‘they will pull the trigger, but rather how many times.

With the Omicron variant of Covid-19 adding to economic uncertainty and fueling a consumer price spike not seen in decades, the Fed’s decision on Wednesday will be scrutinized for signs policymakers will take more aggressive action. to contain inflation.

The Federal Open Market Committee (FOMC), which opens its two-day meeting on Tuesday, is expected to start raising interest rates in March, although a few economists note the possibility of quick action.

“I think it’s kind of a holdover rather than a blockbuster meeting, but the March one will be more fun,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told AFP.

Just a few months ago, Fed Chairman Jerome Powell and other senior officials argued that the sharp rise in inflation would be “transient,” but that position has grown increasingly fragile with each new data report showing prices rising and spreading to many goods, beyond cars and energy. .

By the end of 2021, policymakers admitted they had miscalculated and pivoted, announcing they were ready to tackle inflation head-on.

They began by scaling back the bond-buying program put in place to stimulate the economy, and accelerated the pace of easing at their last meeting in December.

Hawkish or dovish?

Over the past few weeks, Fed officials have given strong signals that once the gradual reduction is complete in March, they will raise the benchmark lending rate for the first time since cutting it to zero. in March 2020 at the start of the Covid-19 pandemic.

“The move toward a rate hike in March is pretty clear — and I expect Powell at his press conference (Wednesday) to reinforce that perception,” said David Wessel, senior economics researcher at Brookings. Institution.

The rise could help contain consumer prices which soared 7% in 2021, with soaring prices for gasoline, food, housing and used cars.

But the question remains how many times the Fed will raise rates.

The causes of inflation are manifold, ranging from global issues such as shortages of semiconductors to more national concerns such as shortages of workers and massive government spending during the pandemic that fattened Americans’ wallets and spurred the request.

“If there’s any mention of inflation persisting, that would also signal that the Fed is not just ready to take off, but wants to fly high,” said Beth Ann Bovino, chief U.S. economist at S&P Global Ratings, in an interview.

FOMC members issued forecasts at the December meeting indicating that most expect three rate hikes this year, although many private economists are now forecasting four.

Another sign would be central bankers saying the labor market has returned to “maximum employment” after the massive layoffs that hit at the start of the pandemic, Bovino said.

Omicron uncertainty

Some traders are speculating that the Fed could announce an early end to the tapering process and a surprise rate hike at next week’s meeting, or choose to hike twice as much as they usually do at the meeting. Of March.

But with Omicron’s complications already evident, including a slump in retail sales during the December holiday season and an increase in new jobless claims last week, Shepherdson doubts Powell wants to change course.

“Why would he do that? It would be really perverse given the uncertainty,” he said.


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