Question to the Fed: has it waited too long to fight inflation? | News, Sports, Jobs
WASHINGTON — With inflation soaring, unemployment falling and wages rising, some economists warn the Federal Reserve may have waited too long to reverse its ultra-low rate policy — a delay that could expose the economy at increased risk.
On Wednesday, the government is expected to announce that consumer prices have jumped 7.1% over the past 12 months, which would be the biggest such increase in decades. Fed Chairman Jerome Powell will likely be asked about the issue during a Senate hearing on Tuesday on his nomination for a second four-year term. Inflation has become the most serious threat to the economy, a growing concern for financial markets and a major political issue for the Biden administration and Democrats in Congress.
While Powell has many defenders who applaud the Fed’s drive to keep interest rates low to help reduce unemployment after the pandemic recession, Friday’s US jobs report for December sounded the alarm. It showed another sharp drop in the unemployment rate, a surprisingly large increase in hourly wages and chronic labor shortages.
Although lower unemployment and higher wages benefit workers, they can also fuel higher prices. The jobs report has led many economists to predict more interest rate hikes this year than previously predicted as the Fed struggles to manage a rapidly changing economy. The Fed is now expected to start raising rates in March – an action that, in turn, would raise borrowing costs for many consumers and businesses.
By waiting as long as it has, the Fed may eventually be forced to accelerate its rate hikes, thus pressing harder on the economic brakes. Yet it could slow growth, disrupt financial markets and potentially trigger a recession. Many past recessions were caused by aggressive rate hikes by the Fed aimed at fighting or preventing inflation.
Last month, in a sharp shift toward tackling inflation, the Fed signaled that it plans to raise its short-term benchmark rate, currently near zero, three times this year. As recently as September, policymakers were split on whether to raise rates just once in 2022.
“There is a substantial risk that the Fed will be far enough behind the curve that it will have to rise to the challenge of letting inflation remain consistently high or risk a recession,” said Tim Duy, chief US economist at SGH Macro Advisors.
Stocks have fallen and bond yields have jumped since minutes from the Fed’s December meeting, released last week, showed officials were likely to act more quickly to tighten credit.
Many economists now expect the Fed to raise its key rate at least four times this year. And according to the minutes of its December meeting, Fed officials are also considering moving faster to get rid of the nearly $8.8 trillion in Treasuries and mortgage bonds they hold, a decision that would also tighten credit. The minutes said policymakers could start letting those holdings dwindle, as securities mature, soon after the Fed’s first rate hike.
For now, the Fed’s policies mostly reflect the emergency settings that have been in place since the pandemic hit in March 2020. In addition to pegging rates at virtually zero, the Fed continues to buy bonds to try to hold longer-term rates. These bond purchases should end in March.
Yet on Friday the government announced that the jobless rate had fallen to 4.2% in December, from 3.9% in November, and was 6.7% a year earlier – the biggest drop. rapid rise in the 12-month unemployment rate since records began in 1948. (This followed the largest increase in unemployment on record in 2020.)
As the number of unemployed fell, companies were forced to raise hourly wages to retain and attract workers. In the last three months of 2021, wages jumped at an annual rate of 6.2%. And for restaurant, hotel and casino workers, wages rose 14.1% in December from a year ago.
“Normally, the Fed would have raised rates much sooner,” Duy said. “The fact that we’ve barely started suggests that the Fed misjudged how quickly the economy was going to get back on track.”
Some economists, however, defend the Fed’s approach. They echo the central bank’s view that inflation is likely to decline this year as the pandemic wanes. The spike in spending on goods, from cars to platoons, will fade as Americans return to spending on travel and eating out, according to this view. This will eliminate bottlenecks in the supply chain, thereby reducing the prices of goods.
And, they say, the Fed’s willingness to keep rates low even as the economy recovers has helped sustain a faster pace of growth and hiring, especially in the face of the extremely slow recovery. after the 2008-2009 recession.
“The Fed is closer to the calendar than to the error” said Skanda Amarnath, executive director of Employment America. “It’s easy for the Monday morning quarterback to say the Fed should have done more last year. But that would have risked leaving too many people unemployed. Even now, the economy has 3.6 million fewer jobs than before the pandemic.
Still, many economists say the Fed remains too bullish on inflation and the rate will remain well above the Fed’s 2% inflation target this year.
“What is currently expected in terms of what the Fed is going to do in 2022 is just too little,” said Jon Steinsson, professor of economics at the University of California, Berkeley.
Steinsson spoke on Saturday during a panel discussion on inflation at the annual meeting of the American Economic Association. Steinsson noted that adjusted for inflation, interest rates are in negative territory despite the economy’s rapid progress.
“I think it’s just too low,” he said.
The three economists on Saturday’s panel – Steinsson; Jason Furman, Harvard economist and former senior adviser to President Barack Obama; and Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former Fed economist, said they believe inflation, the Fed’s preferred measure, will remain at at least 3.5% by the end of the month. end of the year. The Fed thinks it will fall to 2.6%.
Powell has often said that if the pandemic subsides, inflation will come down because supply chains will unravel and more people will take jobs. But Furman argued that other trends will offset some of those benefits. Once COVID-19 cases drop, he said, people will likely drive more and push gas prices up. And as with previous reopenings of the economy, prices for hotel rooms, plane tickets and rental cars could spike.
The Fed had hoped more people would start looking for work again once enhanced unemployment assistance ended nationwide in September. Schools also reopened that month, potentially freeing up more women to return to work after caring for their children during online school. Yet this influx of workers did not happen. There are still 2.2 million fewer people working or looking for work than before the pandemic.
Instead, companies’ desperate demand for workers – with job openings nearing a record high in November of 10.6 million – has driven wages up sharply.
A higher salary should allow for more spending, maintaining upward pressure on prices, Furman said. And rents are now rising rapidly.
Gagnon said on Saturday that the Fed has been too cautious in part because it is too preoccupied with preparing financial markets for policy changes, especially after 2013. At the time, in an episode known as ” temper tantrum “, Chairman Ben Bernanke unexpectedly said the Fed would soon scale back the bond purchases it had been engaged in, a remark that caused stock and bond prices to fluctuate.
“They were marked by the tantrum”, said Gagnon. “I think they’ve veered too far to the other side trying to play down surprise markets.”
Gagnon also defended the Fed, noting the complexity of the economy during the pandemic.
“What they’re doing seems incredibly slow, but they’re transforming a supertanker, they’re communicating with the markets, they’re moving in the right direction, clearly they’re focusing on the right things,” he said.
The Fed can also accelerate its credit tightening if needed, Gagnon said.
“If we’re right about our inflation concerns, they’ll make more than three rate hikes this year,” he said.
Copyright 2022 The Associated Press.