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Thursday, December 2, 2021

Fed officials adjust “transitional” inflation, promise to act if price pressure remains too high

New documents detailing the private discussions at the last Federal Reserve policy meeting show that officials are softening their “temporary” view of inflation, recognizing the recent spike in price increases as more intense and prolonged than they previously thought, and promising act more aggressively. if inflationary pressures remain high for too long.

FOMC’s November 2–3 meeting minutes, released on November 24, show members have revised their short-term inflation outlook upward, blaming faster-than-expected growth in consumer food and energy prices. along with production bottlenecks, rising wages and a tightening labor market.

They said they expect inflation to accelerate from September’s pace, expecting the 12-month change in the Personal Consumption Expenditure (PCE) Price Index to rise and “well above 2 percent” at the end of the year, which is the Fed’s inflation target. …

The latest data from the Department of Commerce has confirmed this forecast. Headline PCE inflation rose 5.0 percent in the 12 months to October, the fastest pace since 1990, while the core PCE, which excludes volatile food and energy categories and is the Fed’s preferred indicator for policy calibration, rose. at 4.1 percent, the fastest pace since 1991. This represents an acceleration in inflation from September’s reading, when the PCE rose 4.4 percent and the base PCE rose 3.7 percent.

While Fed officials felt that the increased price pressures were mainly due to production bottlenecks and other factors that they believed were temporary, they agreed that they should be less convincing in their justification for “temporary” inflation.

Members “agreed that it would be appropriate to express less confidence in the trajectory of inflation, noting that the drivers of higher inflation were“ presumably temporary, ”while noting that“ inflationary pressures may take longer than they previously estimated. … “

Epoch Times Photos
Federal Reserve Chairman Jerome Powell reports to the Senate Banking Committee on Capitol Hill in Washington on February 12, 2020. (Yuri Gripas / Reuters)

Some members expressed the view that drivers of price increases had moved beyond the narrow range of categories associated with the pandemic to become more widespread, although they “generally continued to expect inflation to fall significantly in 2022 due to imbalances in demand and suggestions. subsided. “

However, Fed officials said their uncertainty about inflation has increased.

“Many participants pointed to considerations that may indicate that higher inflation may be more resilient,” the minutes said.

“These participants noted that average inflation had already exceeded 2 percent when measured on a multi-year basis, and led to a number of factors, such as increased opportunities for businesses to pass higher costs onto their customers, the possibility that nominal wage increases were becoming more sensitive to pressure on labor market or favorable financial conditions, which may lead to continued inflation at a high level, ”the document says.

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Several FOMC members have also acknowledged signs that inflation expectations may become “less entrenched,” which the Fed says means people’s expectations of future inflation will be lowered from a target of about 2 percent and will influence their behavior in regarding purchases or to stimulate them. demand higher wages.

The latest New York Fed survey of consumer inflation expectations showed that short-term (one year ahead) inflation expectations rose to 5.7 percent in October, the highest ever in the series. Medium-term (three years ahead) inflation expectations remained unchanged from the previous month’s level of 4.2 percent, which was a record high.

In light of more robust inflation than previously thought and the growing risk of ditching future inflation expectations, Fed officials said they would consider accelerating the $ 120 billion phase-out schedule for the central bank’s monthly asset purchases and raising interest rates.

“Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate earlier than currently anticipated if inflation continues to exceed levels consistent with the Committee’s goals,” the minutes said. …

And while a number of Fed officials have “stressed their patience with the data coming in” due to inflationary pressures to make sure the labor market recovery is well founded before monetary tightening, FOMC members pledged “no”. [to] are hesitant to take appropriate action to address inflationary pressures that have created risks to long-term price stability and employment targets. ”

Katie Bostjancic, chief financial economist at Oxford Economics in the US, told the Associated Press that she believes the Fed will accelerate the cut in bond purchases, which at its last FOMC meeting decided to phase out over eight months at a rate of $ 15 billion a month.

She also said she expects the first rate hike to occur in September 2022, rather than in her earlier forecast for December of the same year.

In response to the fallout from the pandemic, the Fed cut interest rates to near zero and embarked on a massive asset-buying program, moves that a growing number of economists believe have fanned inflation.

Following the Fed meeting in November, several Fed officials publicly announced their readiness to accelerate the reduction in monthly bond purchases.

Tom Ozimek

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Tom Ozimek has extensive experience in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he has ever heard is from Roy Peter Clarke: “Hit your target” and “leave the best for last.”

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