Faced with stubbornly high inflation, US central bankers are considering an accelerated schedule for raising the benchmark borrowing rate, according to minutes of their latest meeting released on Wednesday.
Most of those participating in the Jan. 25 to Jan. 26 US Federal Reserve discussions felt “a faster pace of increases ... would likely be warranted” compared with the previous cycle of monetary tightening between 2015 and 2018.
The Fed slashed rates to zero in March 2020, as the COVID-19 pandemic slammed the US economy, causing millions of layoffs.
Photo: AFP
Just two years later, with the economy facing decades-high inflation, the Fed has signaled that it is ready to begin rate hikes soon, with a first move widely expected next month.
Most economists say that lift-off from zero would be followed by several more hikes this year — with some now saying a larger-than-usual half-point increase is possible next month.
Fed officials stressed that the recovery has been much quicker than the previous cycle.
“Compared with conditions in 2015 ... participants viewed that there was a much stronger outlook for growth in economic activity, substantially higher inflation and a notably tighter labor market,” the minutes said.
After peaking at 14.7 percent in April 2020, the unemployment rate dropped to 4 percent last month.
Meanwhile, inflation has been accelerating for months amid global supply chain snarls and rising demand.
US consumer prices last month climbed 7.5 percent compared with a year earlier, its largest increase since February 1982 and more than triple the Fed’s 2 percent long-term target.
Fed officials, many of whom had expected the pandemic-driven price pressures to recede quickly, have seen the increases growing more widespread and some are worried that inflation could rise still higher if wages accelerate.
They “anticipated that it would soon be appropriate to raise” the policy rate, according to the minutes.
“If inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate,” the minutes said.
The minutes caused some economists to raise their forecasts, with Kathy Bostjancic of Oxford Economics now projecting a half-point increase as the first move.
“We now join the camp arguing the Fed should and will kick off its tightening cycle with a 50 basis points rate hike in March,” she said.
“Thereafter, officials should go back to 25 basis points rate increases at subsequent meetings,” she said, predicting a total of 1.75 basis points of tightening, or six increases, this year.
Separately, US Secretary of the Treasury Janet Yellen said that soaring US inflation rates are “not acceptable,” but the health of the world’s largest economy is fundamentally sound thanks to policies that have mitigated the impact of the COVID-19 pandemic.
Yellen conceded in an interview she is “concerned” about inflation running at its highest level in decades, and warned of further “global fallout” if the West moves ahead with punishing sanctions on Russia over the Ukraine crisis.
However, she voiced confidence that the Fed would act in an “appropriate way” to contain inflation while ensuring the US recovery continues.
“I have confidence the Fed ... [will] deploy their suite of tools in an appropriate way to keep the recovery on track, but also deal with the excess pressures that we have that are causing inflation,” Yellen said.
Energy prices have contributed to rising inflation pressures and tensions with Russia over Ukraine threaten to worsen the situation.
“We are concerned about potential impacts on energy markets, given the importance of Russia’s role as a supplier of oil to the world market and of natural gas to Europe,” she said.
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