High inflation anxiety creeps into Fed: Expert

At the end of a two-day meeting on Wednesday, the Federal Open Market Committee (FOMC) reiterated that inflation remains high, largely reflecting factors that are expected to be transient.

But he made an addition to his last political statement on Wednesday that did not exist in the statement released after the previous meeting on September 22: “The imbalances of supply and demand linked to the [coronavirus] the pandemic and the reopening of the economy have contributed to significant price increases in some sectors. “

Ryan Sweet, a leading US economist at Moody’s Analytics, told Anadolu on Thursday via email that “the change is a subtle hint that some anxiety about how long inflation will stay high is creeping in. in the Fed “.

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He said the change could have been made to ensure that the Fed does not appear “immune” to accelerating inflation, as he noted that other central banks, including the Bank of England and the Bank of Canada, have become more hawkish due to high inflation.

Fed Chairman Jerome Powell told a press conference after Wednesday’s meeting that the bank would use its tools for the price stability if inflation increases.

“Powell was grilled about inflation and rate hikes at his post-meeting press conference,” Sweet said. Powell provided his definition of ‘transient’ because he noted that it meant different things to different people. He described ‘transient’ not in time, but rather whether the factors causing the acceleration of inflation will permanently lead to higher inflation.

Accommodative position on interest rates

The FOMC kept its benchmark interest rate unchanged on Wednesday and decided to start slashing the monthly pace of its net asset purchases by $ 10 billion for Treasury securities and $ 5 billion for back-to-back securities. to agency mortgages.

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However, the Fed has indicated that it is ready to adjust the pace of net asset purchases if the changing economic outlook warrants it.

“This creates a bit of uncertainty, as it’s unclear what conditions would cause the Fed to speed up or slow down its monthly asset purchases,” Sweet said.

Mark Zandi, chief economist at Moody’s Analytics, told Anadolu by email that “the Fed is rightly saying that it may need to be more aggressive in its response by speeding up its cut and / or pulling forward when it begins to increase rates. “

The rate hikes, for now, look far down the Fed’s agenda, as Powell seemed dovish about their possibility.

“We don’t think this is the right time to raise interest rates because we want to see the job market heal more… We have very good reason to believe that will happen with the Delta variant. [of COVID-19] decline, ”he said at the press conference.

Sweet pointed out that Powell has not significantly pushed, or approved, market prices in two rate hikes next year, unlike European Central Bank President Christine Lagarde last week.

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“Powell appeared dovish, pointing out that the labor market has not fully recovered and that the decision to raise interest rates is not something the Fed needs to discuss now,” Sweet said, noting that the Fed chairman seems torn between believing the first rate hike will take place in late 2022 or early 2023.

The expert pointed out that the Fed is in a difficult position as the pressure mounts against high inflation, but he said crushing inflation would hurt the US labor market and delay the return of the US economy to the full employment.

“This cycle is going to be more like a boom-recession than the kind of recovery after the Great Recession,” he noted.

The markets are reassured

Amid the dovish stance on interest rates and the shift in the description of inflation, major U.S. stock market indices hit new all-time highs on Wednesday night.

“The financial markets are reassured [Fed] Policymakers are sticking to the idea that the currently high inflation is due to the pandemic, and as the pandemic subsides, inflation will normalize. This suggests that they won’t need to move forward when they start raising short-term rates, ”Zandi said.

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He warned, however, that the pandemic could go in the wrong direction, which would then further exacerbate inflationary pressures and could raise inflation expectations.

“But at the end of the day, the Fed seems convinced that as the pandemic ends, the economy will grow and inflation will reverse. Global investors are very happy with these forecasts,” he concluded.

Anadolu with additional entry by GVS

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