Will The Fed Be Forced To Raise Rates Earlier Than Expected?

It will be gradual, with ample advance notice. And it’ll only begin once the economy has “fully recovered.” That, at least, is the plan for raising interest rates at some point in the future, Federal Reserve Chair Jerome Powell explained late last month. The key question: Will the economy cooperate?

More specifically, will inflation remain sufficiently tame to permit Powell and company to slowly take away the monetary punch bowl?

“We are strongly committed to inflation that averages 2% over time,” the Fed chair says. “If it were to be higher or lower than that, then we’d use our tools to move inflation back to 2%.”

Fed Vice Chair Richard Clarida also outlined the current plan for gradual policy tightening, explaining that the central bank is intent on leaving rates unchanged until inflation’s running at 2%. “We are not going to lift off until we get inflation at 2% for a year. … We are trying to tie our hands. We are saying we are not going to hike until we get to 2%.”

By that standard, inflation hasn’t been a threat to the Fed’s gameplan. Core and headline inflation, based on the personal consumption expenditures, have been running at around 1.5% a year recently.

But with the economy heating up, and some measures of pricing pressure rebounding sharply, analysts are considering the possibility that inflation could reach 2%-plus sooner than expected. Notably, the prices paid data for US manufacturers has recently posted sharp increases that are far above the pace of consumer inflation.

Also, recent survey data shows a dramatic rise in expectations among small business owners to raise prices.

A key factor that could change the calculus in favor of higher-than-expected inflation is the ramp-up in fiscal spending. Hot on the heels of the recently enacted $1.9 trillion stimulus and relief bill, the Biden administration is now pushing to pass a $2 trillion infrastructure spending plan.

1 2 3
View single page >> |

Disclosures: None.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.