WASHINGTON- The Federal Reserve threw its weight back behind the drive for a full US jobs recovery, restating its belief that current high inflation is “expected to be transitory” and, despite risks to that view, arguing that price pressures will ease and pave the way for stronger employment and economic growth in the months to come.
Even as the US central bank announced it was tucking away one of its main pandemic-fighting tools, by trimming its massive bond-buying program beginning this month, its latest policy statement and Fed Chair Jerome Powell’s remarks in a news conference signaled it would stay patient – and wait for more job growth – before raising interest rates.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizeable price increases in some sectors,” the Fed said in its latest policy statement, adding that “an easing of supply constraints (is) expected to support continued gains in economic activity and employment as well as a reduction in inflation.”
Powell emphasized what he said is the Fed’s intent to push labor markets further with low interest rates, and to withhold judgment about the limits of job creation until further outbreaks of the coronavirus have been contained.
“Ideally, we would see further development of the labor market in a context where there isn’t another COVID spike. And then we would be able to see a lot. To see how does (labor) participation react in the post-COVID world,” he told reporters. “We are going to have to see some time post-COVID, or post-Delta anyway, to see what is possible,” Powell said in reference to the coronavirus variant that was largely responsible for a COVID-19 surge and economic slowdown over the last three months.
Yet inflation was uncomfortably high, Powell acknowledged, blaming it on “turmoil” in global supply chains that is likely to last until perhaps the second half of next year, posing a challenge in the meantime to families on fixed incomes or those earning lower wages.
Inflation for the last five months has been running at twice the Fed’s 2 percent target, and moving in a way Powell said could well satisfy the central bank’s benchmark for a rate increase – once maximum employment is reached.
But for now, he said, the Fed would be “patient” in deciding when to raise its benchmark overnight interest rate from the near-zero level, a counter to rising bets in financial markets that inflation would prompt the central bank to end its pandemic-era support for the economy sooner than later.
The Fed last year said it would allow higher inflation in hopes of encouraging more job growth, but as prices rose this year so did skepticism about the depth of the central bank’s commitment to that new approach.
“We don’t think it is time yet to raise interest rates. There is still ground to cover to reach maximum employment,” Powell said, adding that he thought that goal could perhaps be met late next year.
The Fed, as widely expected, announced on Wednesday that it would begin reducing its $120 billion in monthly purchases of Treasuries and mortgage-backed securities at a pace of $15 billion per month, with a plan to end the purchases altogether in mid-2022.
That bond-buying “taper,” the source of market turbulence when the Fed plotted its exit from a similar asset-purchase program that was rolled out to fight the 2007-2009 recession, this time came off without a hitch. – Reuters
