economy

High inflation, falling unemployment prompted Powell’s Fed pivot

High inflation, falling unemployment prompted Powell’s Fed pivot

High Inflation, Falling Unemployment Prompted Powell’s Fed Pivot BY NICK TIMIRAOS | UPDATED DEC 06, 2021 05:33 AM EST Officials have laid the groundwork to more quickly end a pandemic-era stimulus program at their meeting next week Just four weeks ago, the Federal Reserve set in motion carefully telegraphed plans to gradually wind down a bond-buying stimulus program by June. Officials are making plans to accelerate the process at their policy meeting next week, ending it by March instead. The abrupt shift opens the door to the Fed raising interest rates next spring rather than later in the year to curb inflation, marking a significant policy pivot by Chairman Jerome Powell shortly after President Biden offered him a second four-year term leading the central bank. With this move, Mr. Powell would be focusing the Fed’s efforts more on restraining inflation and less on encouraging employment to return to its pre-pandemic levels. Inflation has surged this year—to 5% in October from a year earlier, according to the Fed’s preferred gauge—amid strong demand for goods and services and supply-chain bottlenecks associated with reopening the economy. At their Dec. 14-15 meeting, Fed officials also could consider revamping their policy statement to stop characterizing higher inflation as “transitory and to clarify their outlook for interest-rate increases next year. Their new individual projections are likely to show most of them expect more than one quarter-percentage-point increase next year. “You’ve seen our policy adapt, and you’ll see it continue to adapt, Mr. Powell told lawmakers during hearings last week. Mr. Powell’s turnabout accelerated over the past month as a slew of new data showed price pressures rising and broadening amid a robust economic recovery, according to public comments and recent interviews. Just days before the Fed’s Nov. 2-3 meeting, the Labor Department reported that the employment-cost index, a widely watched measure of worker compensation that includes both wages and benefits, rose 1.3% in the third quarter from the second, the fastest pace since at least 2001. That added to doubts among some Fed leaders over whether their plan to gradually reduce their $120 billion in monthly bond purchases over eight months, ending in June, would be fast enough. They want to conclude the program before raising interest rates. Still, officials approved the plan at the November meeting partly to avoid surprising investors with a faster wind down and creating turbulence in the markets. Three more reports in the following days added to officials’ concerns that they might be moving too slowly: The Labor Department on Nov. 5 reported strong hiring in October and upward revisions to job gains in prior months without an accompanying increase in the number of Americans looking for jobs. That pushed the unemployment rate down to 4.6%. The rate fell further, to 4.2%, in November. On Nov. 10, a separate report showed inflation pressures had accelerated and broadened in October, defying officials’ forecasts that prices would have peaked by the summer. Finally, on Nov. 16, a report showed consumer spending at retail stores, online sellers and restaurants rose briskly in October. That prompted officials to begin laying the groundwork for Mr. Powell’s pivot. “The good news is the economy is roaring back, New York Fed President John Williams said on Nov. 18. “We’re having huge gains in employment. Unemployment is falling very quickly. On Nov. 19, the same day that Mr. Biden called Mr. Powell to offer him a second term, Fed Vice Chairman Richard Clarida revealed during a question-and-answer session at a research conference that the Fed could consider at its December meeting whether to end the asset purchases sooner than planned. Mr. Powell hinted at the pivot during a White House ceremony on Nov. 22 where Mr. Biden announced his reappointment. Then on Capitol Hill last week, Mr. Powell said it was time to stop describing inflation as transitory, partly due to differences over what that term means and to underscore greater humility in forecasting. The Fed still expects inflation to decline next year, but Mr. Powell indicated the central bank doesn’t want to bet the farm on it. “Almost all forecasters do expect that inflation will be coming down meaningfully in the second half of next year, he said. “The point is we can’t act as though we’re sure of that. The Fed has moved cautiously this year to withdraw stimulus in part because of a new framework officials adopted last year that set aside the central bank’s longstanding preference for pre-emptively raising rates to head off inflationary pressures. The new framework followed a decade in which inflation had consistently defied expectations that it would rise to the Fed’s 2% goal. Fed officials last year laid out a three-part test to raise interest rates that would require inflation to reach 2% and be on course to exceed that while the labor market returns to levels consistent with maximum employment. They have to decide whether, when and how to signal progress toward those objectives, particularly because the inflation test likely has been met. “We said in the new framework that on inflation, we would wait until we saw the whites in their eyes before firing…and now we’ve seen them, said Fed governor Randal Quarles in an interview last Wednesday. “We never said we’d let the army march over us. Officials are giving more weight to the prospect that the aggressive fiscal- and monetary-policy responses to the pandemic last year altered traditional recessionary dynamics, buoying wage growth that normally takes longer to recover after a downturn. A sharp run-up in home values, stocks and other assets has boosted wealth for many Americans, fueling stronger demand and potentially allowing some to retire earlier than they had anticipated, tightening the labor market. Demand might rise higher still if the pandemic subsides at some point, boosting spending on services and leading more Americans to seek jobs. This summer, there were good reasons to think that idiosyncratic price increases, particularly for used cars, weren’t going to last. “If that’s what was driving aggregate inflation, then we’d see that abate pretty quickly, said Mr. Quarles. When subsequent data showed some broadening of price pressures, there was still reason to “give the data a chance to demonstrate that this was going to be a relatively rapidly transitory phenomenon, he said, as supply-chain bottlenecks worked their way out. But by last month, “there was more and more reason to say, ‘No, this is much more broadly based than we had expected’ and that demand is actually well above pre-pandemic levels, said Mr. Quarles. Fed officials for months have stressed the risks of raising rates to cool the economy if supply-chain bottlenecks resolve themselves. But if stimulus and wealth effects are driving stronger demand, “that’s something that monetary policy is made to respond to by raising interest rates, said Mr. Quarles. Even some of those officials who have placed great focus in public remarks on the Fed’s commitment to an inclusive and broad-based employment recovery have signaled the need to pay greater attention to the risks that inflation stays above their 2% target for too long. “If we didn’t have higher inflation readings, you might let the economy go a little bit more to see if we can get through Covid and have those [unemployed] individuals come back, said San Francisco Fed President Mary Daly during a webinar last Thursday. “But the same people who might be sidelined and not getting jobs, they’re also paying higher prices. And inflation is a pretty regressive tax. Download.

economy 2021-12-06 Livemint