WASHINGTON: The Federal Reserve opened its two-day policy meeting on Tuesday, focused squarely on how to address the worsening US inflation threat.
Fed Chair Jerome Powell has signalled that the central bank will pull back on its pandemic stimulus measures more quickly, which would put it in position to raise interest rates and try to quash the wave of rising prices that have hit American households.
A Fed spokesperson confirmed the start of the two-day meeting of the policy-setting Federal Open Market Committee (FOMC), which will wrap up on Wednesday with a statement and press conference where policymakers are expected to announce the Fed will further reduce the rate of its monthly bond purchases.
That will put it on pace to end the programme in March, weeks earlier than initially planned, and then leave the central bank poised to act directly against inflation by hiking the benchmark borrowing rate as early as May.
Powell for months has argued that most of the price increases were due to temporary pandemic-linked factors that would dissipate, but in late November he acknowledged that inflation could be ‘persistent’.
Annual consumer price inflation hit a nearly 40-year high of 6.8 per cent in November, with data showing the increases continuing to spread beyond autos and energy to food and housing.
Inflation pressures growing?
The Labour Department reported Tuesday that the producer price index surged 9.6 per cent in the 12 months ended in November, which the FOMC may take as another sign of rising price pressures as the economy recovers from the Covid-19 pandemic.
It was the biggest jump since the Labour Department began calculating the index in November 2010, pushed by increases in a broad array of goods and services, which could spread to consumers.
Though economists believe inflation may have peaked as supply issues due to the pandemic restrictions are resolved, that does not ease the pressure on the Fed to act to prevent the price increase from becoming a self-fulfilling prophecy.
“While we continue to expect producer prices to reach an apex in (the fourth quarter), persistent supply headwinds will keep input and transportation costs sticky and only allow for a gradual moderation in price,” Mahir Rasheed of Oxford Economics said.
Powell in testimony before Congress last month repeated his pledge that policymakers “will use our tools to make sure that higher inflation does not become entrenched.”
The FOMC will release its quarterly economic forecasts, which are expected to show committee members shifting to a more aggressive stance on interest rate hikes.
Economists expect central bankers to lean towards three or even four hikes in 2022, rather than just one projected in September. But the rapid spread of the Omicron variant of Covid-19, which has caused some countries to re-impose restrictions, is casting a shadow over the economic outlook that could complicate the job of the central bank.
“Omicron has clearly added a huge cloud of uncertainty over the outlook for the economy in the coming months just as many countries were preparing for tighter monetary policy,” Craig Erlam of Oanda said.