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The central bank’s withdrawal triggered nervousness in financial markets, with the benchmark S&P 500 stock index in September recording its worst month since March 2020. The danger of ever higher inflation and the prospect of a slowdown in the The saving by the Fed by raising rates in 2022 will also pose a political danger to President Joe Biden and Democrats in an election year, where they hope they can point to a solid recovery.
“The drive wheels are kind of turned off for the economy,” said Michael Feroli, chief US economist at JPMorgan Chase, the nation’s largest bank. “If the party is to continue, the Fed must let it continue. “
This is not likely to happen for long. Powell acknowledged at a conference Wednesday that inflationary pressures are expected to continue next year, even though he expects them to ease eventually. The Fed chairman said he found it “frustrating that bottlenecks and supply chain problems did not improve – in fact, margins apparently worsened a little.” The Fed hit a new 30-year high.
At the height of the pandemic last year, the Powell Fed and Congress took unprecedented action to support businesses, households and financial markets – injecting trillions of dollars into the economy to fill the gaps. gaping income holes and facilitate cheap loans. The Fed continued to buy $ 120 billion a month in government securities to keep rates low.
The speed and strength of the response worked. US growth is expected to exceed 5% this year, its fastest pace in decades. But the coronavirus is still looming in all forecasts, and the threat of an increase in cases as the weather cools could dampen growth, given little more is expected from the type of aid to short term adopted by Congress over the past year and a half. Even the broad legislative packages that lawmakers are debating on Capitol Hill now contain mostly measures that would span several years.
“We had the perfect confluence of tail winds” that boosted the economy earlier this year when everything seemed to reopen amid widespread immunizations, bolstered by relief checks and other aid, said Julia Coronado , former Fed economist and president of MacroPolicy Perspectives. “Now it’s all in the rearview mirror. “
Top White House economic advisers will not publicly call on Powell to maintain super-easy monetary policies as Washington suffers from another round of fiscal follies, including the possibility of a debt limit scare at mid-October. But they are privately anxious that Powell, who would like to be reappointed for a second term as Fed chairman later this year, sins on the softer side, given that the unemployment rate is still high at 5.2%, while millions of people out of work Americans are left completely on the sidelines.
Joe Brusuelas, chief economist at mid-market consulting firm RSM, said Powell has a fine line to walk: interest rate hikes aren’t ideal for the White House as the election looms. mid-term, but increased inflation figures until next year could create a different situation. set of worries – suggesting the need to tighten up at least a little.
“Inflation, although it has probably peaked, will remain high for the next two years,” he said. “The Fed cannot ignore this.”
Powell said the Fed plans to start slowing its bond purchases in November and aims to stop them completely by the middle of next year, which could lead to a rate hike in the second half of 2022. At that point At that point, the central bank better understand how supply chain distortions lead to price increases throughout the economy.
“Those [supply-chain] the effects have been larger and longer lasting than expected, but they will subside, ”the Fed chief told lawmakers this week.
The outlook could improve if the pandemic begins to fade and the economy is able to stand more firmly on its own, cushioning markets from the phasing out of Fed support and easing production delays. Shares rallied on Friday following news from pharmaceutical company Merck that its experimental pill was aggressively reducing the chances of being hospitalized or dying from Covid.
“As the economy grows stronger, Washington becomes less important,” said Richard Bernstein, founder of investment firm RBA.
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