Fed’s ‘transitory’ inflation plot thickens again with rate at 30-year high

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WASHINGTON (Businesshala) – Inflation pushed more widely through the economy in October, challenging the Federal Reserve’s outlook for only “transient” price hikes, offsetting recent wage increases for consumers, and investors. To boost bets, the central bank will raise interest rates sooner than expected.

FILE PHOTO: The Federal Reserve building is seen in Washington, US, October 20, 2021. Businesshala/Joshua Roberts/File photo

The yield on the two-year Treasury note, a proxy for the overnight interest rate set by the Fed, jumped 6 basis points, the most in three weeks and one of the biggest daily increases in the past year and a half, to 0.485% since the data was released on Wednesday. Post-consumer prices increased by 6.2% in October compared to a year earlier.

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It was the largest one-year jump in prices in 30 years and applied to staples such as food, energy and rent, as well as commodities such as automobiles, where the Fed raised prices along with pandemic-induced “barriers”. The speed was expected to slow down. in global supply chains.

But those “bottlenecks” remain due to strong US consumer demand, and increased inflation measures to cushion the impact of outright spikes in goods and services.

The Cleveland Fed increased both the “truncated mean” index of consumer prices and one that tracks average levels of prices, indicating that price pressures were increasing in a more broad set of goods and services.

(Graphic: Alternative Inflation Measures – )

Still, a Fed policymaker said on Wednesday that the central bank should still be patient.

“We’ll have to wait to see how it moves through the economy,” San Francisco Fed Chair Mary Daly said on Businesshala TV, before changing monetary policy in response.

There was a short lease in the markets. The pricing target in futures contracts is tied to the federal funds rate, giving investors the prospect of the Fed raising rates a cumulative 0.50 percentage point twice through September. Expectations for a third quarter-point rate hike in December rose to nearly 50% compared to less than 30% on Tuesday.

Rick said, “The risks posed by inflation are increasingly on the minds of Federal Reserve policymakers, because too long excessive housing, or essentially overheating the economy, could well capture unintended market consequences that could potentially lead to economic growth.” further undermines confidence and ultimately impairs recovery,” Rick said. Rieder, chief investment officer for global fixed income at investment giant Blackrock.

With demand, supply and wage pressures expected to continue, “near-term inflation readings could scare off ‘inflation fighters’ … which pressure central bankers to discuss at least a rapid response-action can put.”

not ‘linear’

For both the Fed and the Biden administration, what had been an unshakable belief in temporary inflation has been pacified.

“We know the recovery from the pandemic will not be linear,” Biden’s Council of Economic Advisors said on Twitter, prompting prices to rise much faster than anticipated. The CEA “will continue to monitor the data as it arrives,” the office said.

The price hike has also had the depressing effect of raising wages that the Fed and White House hoped would flow to low-wage workers in hotels, restaurants and other industries during last year’s pandemic shutdowns and a cautious return to in-person services since then. .

Inflation on a month-to-month basis almost completely offset the strong wage growth seen in the leisure and hospitality industry in October, said Nick Bunker, director of research for North America at the job site.

Overall, real hourly wages fell 1.2% in October from last year, more than offset by a 6.2% increase in wage benefit prices for the past 12 months of nearly 5%.

Workers’ purchasing power has steadily increased since 2013, with the benefits of low inflation boosting “real” wages after several years of stagnation following the 2007–2009 financial crisis and recession, which has continued to reverse.

(Graphic: Wages vs. Prices – )

The Fed has said it is reluctant to raise interest rates until more people return to jobs after being sidelined during the pandemic, even if inflation exceeds its formal 2% target “for some time”. Be.

The jobs-first strategy is a change from the previous approach that tried to use high unemployment to keep prices under control – actually imposing the costs of fighting inflation on unemployed people during economic downturns.

The Fed still hopes that inflation will, over time, reduce the risk of slowing or reversing job growth, without needing to ratchet up higher interest rates to cool the economy, and in the process.

But the longer inflation figures stay ahead of expectations, the more difficult it will be.

“With annual inflation now above 6%, is this enough to force the Fed’s hand? This long, long term has to put pressure on the Fed,” said Seema Shah, chief strategist at Principal Global Investors.

Reporting by Howard Schneider; Additional reporting by Ann Safir in San Francisco and Shreyashi Sanyal in Bengaluru; Editing by Dan Burns and Andrea Ricci

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