Officials announces tapering of programme amid fears central bank may raise rates to curb inflation
Last modified on Wed 3 Nov 2021 15.54 EDT
The US Federal Reserve has announced it is winding down the massive stimulus programme it put in place at the onset of the Covid-19 pandemic amid fears that the central bank may have to raise rates soon to control rising inflation.
Fed officials have been debating for months over whether and when to taper the stimulus programmes that it set up to head off the economic headwinds caused by the pandemic. They announced on Wednesday that they would begin cutting that stimulus by $15bn a month but left interest rates unchanged.
However the Fed chair, Jerome Powell, also warned that inflation had been “longer lasting than anticipated”. While Powell said the Fed still expected recent price rises to be “transitory”, he added that it was “very difficult to predict the persistence of supply constraints or their effects on inflation”.
In March 2020 as the pandemic brought the global economy to a shuddering halt, the Fed moved to prop up the US economy by cutting interest rates to close to zero and started buying $120bn a month in Treasury- and mortgage-backed securities.
The initiative appears to have helped the US bounce back from a potential economic catastrophe. The unemployment rate has dropped from a record high of 14.7% in April 2020 to 4.8% in September.
But now the central bank is wrestling with concerns that its stimulus efforts, combined with cash injections from Washington, pent-up consumer demand and the unprecedented impact of the pandemic on the global supply chain, are driving up inflation.
Annual inflation is at a rate unseen in 30 years, according to US government figures released last month. Prices for US goods climbed by 4.4% in the year through September, according to the department of commerce’s latest personal consumption expenditures report, the fastest increase since 1991.
The rising cost of fuel is also adding to prices and causing misery for millions of Americans struggling to pay their utility bills.
“We understand the difficulties that high inflation poses for individuals and families, particularly those with limited means for higher prices for essentials such as food and transportation,” Powell said.
At a press conference he would not be drawn on when or if the Fed would raise rates to tackle inflation but said the Fed would “use our tools as appropriate” should prices continue to rise.
Powell, and the Treasury secretary, Janet Yellen, have argued that the sharp rise in prices will decline as the economy recovers from the unprecedented impact of the pandemic.
The Fed’s carefully worded post-meeting statements have described high inflation as “largely reflecting transitory factors” since April. But the trend has gone on longer than the central bank first predicted.
In August, Powell said the Fed was seeing some “moderation” in post-pandemic price rises and pointed to the used car market, where prices have skyrocketed as supply has failed to keep up with demand from consumers.
“Used car prices, for example, appear to have stabilised. Indeed some price indicators are beginning to fall,” he said. Prices of new and used cars have, however, continued to rise as manufacturers continue to struggle with a global shortage of microprocessors.
The Fed statement comes before Friday’s release of the US’s monthly jobs report. In September just 194,000 new jobs were added, well below the 500,000 that economists had predicted.
That report was compiled in the middle of the month, when the Delta variant was at its peak. October’s jobs report will be closely watched to see whether the waning of the variant has encouraged more hiring.
Source: Read Full Article