WASHINGTON- Price and wage increases running at multi-decade highs may challenge Federal Reserve officials this week as they try to maintain a balance between ensuring inflation remains contained and giving the economy as much time as possible to restore the jobs lost since the pandemic.
Investors on Monday continued to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in federal funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.
Purchasing managers, meanwhile, see price pressures continuing to build, with the Institute for Supply Management’s Price Index rising sharply as manufacturing firms shouldered higher input costs.
Though policymakers would prefer to remain patient in raising rates, the window for them to hold off may be narrowing, economists at Goldman Sachs said as they became the latest to accelerate their rate hike call, moving it ahead a full year to July 2022.
By then, Goldman economist Jan Hatzius and others wrote that they expect inflation, as measured by the closely monitored core personal consumption expenditures price index, still to be above 3 percent – a run of inflation not seen since the early 1990s and one well above the Fed’s 2 percent target.
Aspects of the job market, particularly the labor force participation rate, are unlikely to have recovered to pre-pandemic levels, and would seemingly still be short of the “maximum employment” the Fed has promised to restore before raising interest rates. But at that point, the Goldman team wrote, Fed officials would “conclude that most if not all of the remaining weakness in labor force participation is structural or voluntary,” and proceed with rate hikes to be sure inflation remains controlled.
“Since the (Federal Open Market Committee) last met in September, the unemployment rate has fallen further, average hourly earnings and the employment cost index have posted strong increases, inflation has remained high,” they wrote, challenging the Fed’s narrative that inflation will pass on its own without using a rate increase to tighten credit conditions and slow business and household purchases.
The Fed meets this week and will issue a new policy statement on Wednesday at 2 p.m. (1800 GMT), with a press conference following at 2:30 p.m. (1830 GMT) by Fed Chair Jerome Powell. Officials are expected to approve plans for scaling back their current $120 billion in monthly bond purchases that would phase them out completely by the middle of next year – a first step away from the core policies put in place in early 2021 to battle the economic fallout from the pandemic.
