‘Patient’ or ‘aggressive’? Fed policymakers split on inflation response

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* Fed policymakers wrestle with extent of inflation threat

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* Minutes of the September meeting due at 2 p.m. EDT (1800 GMT)

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Oct 13 (Businesshala) – US central bankers broadly agree they may start reducing their support for the economy too soon, but are divided on how high inflation threatens, and – more importantly – This is what they might need to do about it.

Some signs of the intensity of that debate should emerge on Wednesday when the Federal Reserve released the minutes of its September 21-22 policy meeting, at which officials sent their clear signal here that the days of crisis-era policy were numbered.

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This year the economy is set to grow at its fastest pace in decades, inflation is riding well above the Fed’s comfort zone and the labor market has recovered substantially from the devastation of the coronavirus pandemic, with most policymakers Believe it is prudent to start cutting $120 billion. The central bank is doing monthly asset purchases to accelerate the economic recovery.

Fed Chair Jerome Powell said last month that, as long as job market data is “decent,” he expects the Fed’s purchases of Treasury and mortgage-backed securities to begin next month and be completed by the middle of the next month. Year.

After a government report on Friday that US employers added 194,000 jobs here last month, well below the expectations of many economists, Fed Vice Chairman Richard Clarida said on Tuesday that the employment guidepost was “all but met”, though he added specifics for November. was not specifically indicated. Beginning of tapering of asset purchases.

He reiterated Powell’s forecast for the timing of the end of the “taper” and the readout of the September policy meeting will likely strengthen that outlook. The Fed is scheduled to release the minutes of that meeting at 2 p.m. EDT (1800 GMT).

As stated by Philadelphia Fed President Patrick Harper, most analysts expect the impending taper to be steady and “boring.”

Any indication in the Minutes or elsewhere that policymakers plan to accelerate or slow the taper, depending on the pace of economic recovery, would mark a departure from the predictable pattern the Fed followed in 2014, when it asked nurses. The bond purchases made for Rs. The economy recovered after the financial crisis and recession of 2007-2009, and this will come as a surprise to the markets.

More likely, perhaps, is that the minutes provide new color around policymakers’ inflation outlook, and in particular whether one thinks they should eventually reach full employment in order to prevent inflation from moving upward. You have to give up your goal.

“I don’t think most central bank leaders think they’re facing that tradeoff right now,” Harvard University economics professor Karen Dinan said last week, “because they think inflation will subside.” “If we get to next year the election will be relevant and … inflation is uncomfortably high.”

Economic projections released last month along with the Fed’s policy statement projected the central bank to walk this year at 4.2%, more than double its flexible 2% target. The US government will release the latest inflation data on Wednesday.

‘unpleasant situation’

Powell and Clarida have played down that possibility. Even though Fed policymakers are evenly divided as to whether they believe interest rate hikes should begin next year or in 2023, their projections are “completely consistent” with the Fed’s policy framework. which aims to achieve both maximum employment and stable inflation, Clarida said on Tuesday.

But public comments from other policymakers, including the Fed’s two longest-serving regional Fed chairmen, suggest there is an active discussion beneath the surface.

St. Louis Fed Chairman James Bullard worries that current high inflation could persist and become embedded in the economy, requiring a more “aggressive” response from the central bank. He worries that inflation could remain high or be higher, and wants the Fed to reduce its asset purchases early next year so that it can raise rates in the spring or summer if needed.

Chicago Fed President Charles Evans expects inflation to calm down on its own as businesses work through the supply constraints that are currently putting upward pressure on prices. He advises his colleagues to “be patient” and not to start increasing data rates until the end of 2023.

Clarida, for its part, said Tuesday that they see little indication that rising wages are feeding into an unhealthy rise in inflation, but it is the “big unknown” of how long price-rising supply bottlenecks last. He did not give his current forecast for a rate hike.

How policymakers’ differing views shape the actual timing of the Fed’s rate hikes matter not only to those who follow and invest in the markets, but to Americans at large, particularly Millions of people who were working before the pandemic but are no longer employed.

If Fed policymakers think it needs to raise rates to offset inflation prematurely for the economy to reach full employment, this could lead to a shortfall in recovery.

If they choose to delay raising rates to give the labor market a greater chance to heal, but meanwhile miscalculate the staying power of inflation, they may need to raise rates to fill lost ground against inflation. may have to increase rapidly.

Tim Dew, an economics professor at the University of Oregon, said it was shaping up to be an “unpleasant situation”, further compounded by uncertainty over who will lead the Fed when Powell’s term as chairman ends in February 2022. has become intense. US President Joe Biden has not yet said whether he will reappoint Powell or choose someone else to head the central bank. (Reporting by Ann Safir; Editing by Dan Burns and Paul Simao)

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