Inflation worries dominated Fed's last meeting

WASHINGTON (NYTIMES) – Worries about inflation dominated the Federal Reserve’s November policy meeting, with some policymakers suggesting that the United States central bank should move more quickly to reduce its bond-buying programme in order to give it flexibility to raise interest rates sooner if necessary.

The Fed has been buying US$120 billion (S$164 billion) in bonds each month and has kept interest rates near zero, policy moves that have helped make borrowing cheap and keep money flowing through the economy.

This month, the Fed took the first step towards withdrawing support for the economy when it announced that it would begin scaling back its Treasury bond and mortgage-backed security purchases by US$15 billion a month starting in November.

“Some participants suggested that reducing the pace of net asset purchases by more than US$15 billion each month could be warranted so that the committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in the light of inflation pressures,” minutes from the meeting showed, referring to the Federal Open Market Committee, which sets interest rates.

Those comments reflected uncertainty at the central bank over how long supply chain kinks and elevated prices might continue. Fed officials maintained their expectation that inflation would diminish “significantly during 2022”, but policymakers “indicated that their uncertainty regarding this assessment had increased”.

“Many participants pointed to considerations that might suggest that elevated inflation could prove more persistent,” officials said.

Inflation has picked up over the past year, posing a challenge for the Fed, which is responsible for maintaining stable prices and fostering maximum employment.

Prices have continued to surge since the Fed’s last meeting, a trajectory that could push policymakers to reduce their economic support more quickly than previously expected.

Inflation has climbed as supply chain snarls, wage hikes and soaring demand for goods have pushed prices higher; policymakers noted that increased rent and energy prices have also played a role. Inflation has become a persistent issue for the White House, depressing President Joe Biden’s approval ratings and complicating the path to a full economic recovery from the pandemic.

Data released on Wednesday (Nov 24) showed that prices were rising at the fastest pace in three decades as consumers face higher gas and food costs. Prices climbed by 5 per cent in the 12 months to October, according to the personal consumption expenditures index, the Fed’s preferred measure of inflation.

Fed vice-chair Richard Clarida hinted last week that it could be appropriate for policymakers to consider speeding up their process of slowing bond purchases at their next gathering, saying that he will be looking “closely at the data that we get between now and the December meeting”.

Officials have tried to separate their path for slower bond buying from their plans for interest rates. But investors increasingly expect rate increases to start midway through 2022.

The Fed has said that it wants to achieve full employment before raising borrowing costs to cool the economy. Fed chair Jerome Powell has said that he does not believe the labour market has met that test yet. More than four million jobs remain missing when compared with the number of people working before the pandemic.

At the meeting, officials discussed why more workers were not returning to the labour force. Several policymakers suggested that “labour force participation would be structurally lower than in the past, and a few of these participants cited the high level of retirements recorded since the start of the pandemic”. Others continued to point to pandemic-related factors such as childcare constraints and concerns about Covid-19.

There have been some positive signs in recent weeks. Household spending in October rose 1.3 per cent from September even as prices spiked, the Commerce Department said on Wednesday.

Data released by the Labour Department on Wednesday also found that initial jobless claims dropped to their lowest point since 1969, falling to 199,000 last week. But some economists cautioned that the weekly data was potentially overstated by seasonal factors, and claims could still increase in the coming weeks.

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