The Fed faces fresh pressure to raise interest rates as inflation soars to a 30-year high

The Federal Reserve For months, he has taken a patient attitude about higher-than-expected inflation, repeatedly stating that months of persistently high consumer prices are temporary and that raising interest rates too soon threatens the US with a full job recovery.

But experts are putting that philosophy into question, after the government reported Wednesday morning that US consumer prices rose 6.2% in October from a year earlier. So-called core prices, which exclude the most volatile measures of energy and food, have risen 4.6% over the past year. Both represent the largest increases in 30 years.

“It’s hard to see how the Fed will be able to stay on the sidelines for much longer,” said Matthew Sherwood, global economist at the Economist Intelligence Unit.

Combined with new evidence that the labor market is recovering from the summer slump – the unemployment rate fell to a new pandemic level of 4.8% in October as the economy added 531 thousand job opportunities The US central bank may have no choice but to raise interest rates as soon as next summer.

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Merchants are now pricing in at least two rate hikes in 2022, and the probability of a third rate hike is 46%, according to CME’s FedWatch. a tool.

Still, others doubt that October’s inflation rate alone will force the US central bank to change course. Seema Shah, chief strategist at Principal Global Investors, noted that policy makers are not only fully focused on maximizing employment, but have already factored in above-target inflation in their economic forecasts.

“Is that enough to force the Fed’s hand?” Shah asked. “This prolonged and prolonged transition period should increase pressure on the Federal Reserve – however it is doubtful that they will act before late 2022.”

Last week, the Federal Open Market Committee announced plans to gradually begin winding down its aggressive $15 billion per month bond-buying program — a decision that was telegraphed to markets in order to head off a potential sell-off. Under the current time frame, the Fed will stop buying bonds in June; It has previously said it wants to end this program before raising interest rates.

However, what the Fed has not addressed is whether persistently high inflation has caused it to reconsider its very low interest rates.

Chairman Jerome Powell has repeatedly emphasized that inflation is “temporary” and has blamed crippled supply chains, pent-up consumer demand, and a liquidity spur for higher prices. But he has adjusted his tone in recent weeks, acknowledging that rising inflation may not abate until the latter half of 2022.

“Our baseline forecast is that supply bottlenecks and shortages will continue well into next year, and inflation will also rise,” Powell told reporters. “That is, as the pandemic subsides, supply chain bottlenecks will recede and job growth will pick up again. With that happening, inflation will drop from today’s highs.”

When it comes to raising interest rates in order to curb inflation, central bank officials are concerned that economic support will diminish too soon and hamper the US recovery from the pandemic.

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In response to a question during a press conference whether the markets, which take into account a rate hike at least once next year, Powell objected. He indicated that federal policymakers would wait for supply chain disruptions to dissipate and slow inflation, which he predicted could happen in the second or third quarter of 2022, before raising prices.

“We will be patient,” he said. “If the need arises, we will not hesitate.”

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