Fed to discuss a pullback in economic aid with inflation up

Jul 26, 2021, 8:18 AM | Updated: 10:02 am

WASHINGTON (AP) — With inflation uncomfortably high and the COVID-19 Delta variant raising economic concerns, a divided Federal Reserve will meet this week to discuss when and how it should dial back its ultra-low-interest rate policies.

For now, the U.S. economy is growing briskly in the wake of the pandemic recession, and the pace of hiring is healthy, which is why the Fed’s policymakers will likely move closer toward acting soon. In particular, the officials are expected to discuss the timing and mechanics of slowing their $120 billion-a-month in bond purchases — a pandemic-era policy that is intended to keep long-term loan rates low to spur borrowing and spending.

This week’s meeting occurs against the backdrop of a risky policy bet by Fed Chair Jerome Powell. Powell is gambling that the central bank can engineer an exceedingly delicate task: To keep the Fed’s short-term benchmark rate pegged near zero, where it has been since March 2020, until the job market has fully healed, without fueling a sustained bout of high inflation.

Yet the stakes around that bet are rising, with consumer prices having jumped 5.4% in June from a year ago, the biggest increase in 13 years. Last month’s surge marked a fourth straight month of unexpectedly large price increases, heightening fears that persistently higher inflation will erode the value of recent pay raises and undermine the economic recovery.

The main concern is that the Fed will end up responding too late and too aggressively to high inflation by quickly jacking up interest rates and perhaps causing another recession. Last week, Republicans in Congress peppered Powell with questions about inflation, for which they largely blamed President Joe Biden’s $1.9 trillion stimulus package, which was enacted in March.

In his testimony, Powell largely stood by his view that higher inflation will prove temporary. His reasoning is that recent high price increases — for things like used and new cars, hotel rooms and airline tickets — have been driven mainly by supply shortages related to the swift reopening of the economy. But he also stated more explicitly than before that the Fed won’t hesitate to raise rates should it decide that inflation is getting out of control.

After a period of broad agreement during the pandemic crisis, the Fed’s policymakers appear divided over how soon to start reducing — or “tapering,” in Fed parlance — its monthly bond purchases. Several regional Fed bank presidents support tapering soon, including James Bullard of the St. Louis Fed, Patrick Harker of the Philadelphia Fed and Robert Kaplan of the Dallas Fed.

Powell has said that the central bank wants to see “substantial further progress” toward its goals of maximum employment and price stability before it would consider reducing the bond purchases. To make up for years of inflation remaining below 2%, Powell said, the Fed wants inflation to moderately exceed its 2% average inflation target and to show signs of remaining above it for an unspecified time. In recent months, as consumer demand has exceeded the supply of goods and services in some industries, inflation has topped 2%.

Powell suggested during his congressional testimony last week that the economy was “still a ways off” from achieving that progress. On Wednesday, when the Fed issues a policy statement and Powell holds a news conference, any signal that such progress is near could mean that the Fed is getting closer to reducing its bond purchases.

Nathan Sheets, chief economist at PGIM Fixed Income and a former director of international finance at the Fed, said the divide on the Fed reflects two sharply different ways of viewing the economy. Those officials who support an earlier taper are likely focused on current levels of high inflation and the fact that the economy has nearly returned to its pre-pandemic size.

Hiring is robust and is being held back mostly by a shortage of workers, rather than a lack of demand for them, Sheets said. Under this view, the Fed can’t do much about labor supply.

“The economy is, bottom line, much better than it was a year ago,” Sheets said. “It is getting harder and harder for the Fed to explain why it needs to keep buying $120 billion of assets a month.”

Yet Powell and the rest of the Fed’s leadership — notably Richard Clarida, vice chair of the Fed’s board, and John Williams, president of the Federal Reserve Bank of New York — will likely stick to a go-slow approach toward withdrawing economic support, Sheets said.

It’s not yet clear how the highly contagious and fast-spreading delta variant of the coronavirus might affect the U.S. or global economies, Sheets said, or how the job market will fare in coming months. Hiring could accelerate in September as schools reopen, more parents are able to take jobs and expanded unemployment aid programs expire.

“There is no reason whatsoever for us to be in a hurry here,” Sheets said, summarizing the leadership’s likely view. The bond market is signaling much less concern about future inflation, with the yield on the 10-year Treasury note having fallen by nearly a half-percentage point since the spring, to about 1.28%.

This also gives the Fed more time to consider its options, Sheets said.

Powell has said the Fed will communicate its intention to taper “well in advance” of doing so.

David Mericle, an economist at Goldman Sachs, said that based on historical practice, that would mean that the central bank will likely signal its intentions about two meetings before announcing a move. Accordingly, Mericle predicts that the Fed will provide its first clear hint about tapering at its September meeting, followed by another signal in November before announcing the actual taper in December.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


Khadidah Stone stands on the dividing line between her old Alabama congressional District 7, to her...
Associated Press

Black representation in Alabama tested before Supreme Court

MONTGOMERY, Ala. (AP) — The invisible line dividing two of Alabama’s congressional districts slices through Montgomery, near iconic sites from the civil rights movement as well as ones more personal to Evan Milligan. There’s the house where his grandfather loaded people into his station wagon and drove them to their jobs during the Montgomery Bus […]
22 hours ago
The cargo ship Laodicea sails through the Bosphorus Strait in Istanbul, Turkey, on July 7, 2022. An...
Associated Press

Russia smuggling Ukrainian grain to help pay for Putin’s war

BEIRUT (AP) — When the bulk cargo ship Laodicea docked in Lebanon last summer, Ukrainian diplomats said the vessel was carrying grain stolen by Russia and urged Lebanese officials to impound the ship. Moscow called the allegation “false and baseless,” and Lebanon’s prosecutor general sided with the Kremlin and declared that the 10,000 tons of […]
22 hours ago
FILE - Members of the Oath Keepers stand on the East Front of the U.S. Capitol on Jan. 6, 2021, in ...
Associated Press

Jurors to begin hearing Jan. 6 Oath Keepers sedition case

WASHINGTON (AP) — Federal prosecutors will lay out their case against the founder of the Oath Keepers extremist group and four associates charged in the most serious case to reach trial yet in the Jan. 6, 2021, U.S. Capitol attack. Opening statements are expected Monday in Washington’s federal court in the trial of Stewart Rhodes […]
22 hours ago
FILE - The U.S. Supreme Court is seen, March 18, 2022 in Washington. The Supreme Court opens its ne...
Associated Press

Supreme Court welcomes the public again, and a new justice

WASHINGTON (AP) — The Supreme Court is beginning its new term, welcoming the public back to the courtroom and hearing arguments for the first time since issuing a landmark ruling stripping away women’s constitutional protections for abortion. Monday’s session also is the first time new Justice Ketanji Brown Jackson, the court’s first Black female justice, […]
22 hours ago
FILE - Playa Salinas is flooded after the passing of Hurricane Fiona in Salinas, Puerto Rico, Monda...
Associated Press

‘We’re with you,’ Biden tells Puerto Rico ahead of visit

WASHINGTON (AP) — President Joe Biden on Monday will survey damage from Hurricane Fiona in Puerto Rico, where tens of thousands of people are still without power two weeks after the storm hit. The Category 1 hurricane knocked out electrical power to the U.S. territory of 3.2 million people, 44% of whom live below the […]
22 hours ago
FILE - Mormons listen during The Church of Jesus Christ of Latter-day Saints' twice-annual church c...
Associated Press

Church of Jesus Christ of Latter-day Saints leader calls abuse ‘abomination’ amid policy scrutiny

Russell M. Nelson, the president of The Church of Jesus Christ of Latter-day Saints, told members of the faith on Saturday that abuse was "a grievous sin" that shouldn't be tolerated and would bring down the wrath of God on perpetrators.
22 hours ago

Sponsored Articles

Quantum Fiber

How high-speed fiber internet can improve everyday life

Quantum Fiber supplies unlimited data with speeds up to 940 mbps, enough to share 4K videos with coworkers 20 times faster than a cable.
Day & Night Air Conditioning, Heating and Plumbing

Ways to prevent clogged drains and what to do if you’re too late

While there are a variety of ways to prevent clogged drains, it's equally as important to know what to do when you're already too late.
Mayo Clinic Orthopedics and Sports Medicine

Why your student-athlete’s physical should be conducted by a sports medicine specialist

Dr. Anastasi from Mayo Clinic Orthopedics and Sports Medicine in Tempe answers some of the most common questions.
Fed to discuss a pullback in economic aid with inflation up