By CHRISTOPHER RUGABER, economic editor of the AP
WASHINGTON (AP) – Federal Reserve Chairman Jerome Powell on Tuesday took a sudden and unexpected turn to tighten consumer and business credit amid growing concerns over high inflation.
Powell has signaled that the Fed will likely move faster to phase out its ultra-low interest rate policies even as the emergence of the new omicron variant of COVID-19 has raised new doubts about the future of the economy and the direction of inflation.
The Fed chairman told the Senate Banking Committee that central bank policymakers will discuss at their next meeting in mid-December whether to accelerate the reduction in their monthly bond purchases, which aim to reduce long-term borrowing costs. The Fed has just announced these cuts in early November at a rate that would end bond purchases in June. But on Tuesday, Powell signaled that the Fed was inclined to end those purchases several months before that date.
This would put the Fed on track to start raising its key short-term interest rate as early as the first half of next year. This rate has been close to zero since last March, when the coronavirus plunged the economy into a deep recession. A higher Fed rate would in turn increase borrowing costs for mortgages, credit cards and some business loans.
Stock prices fell after Powell’s comments and the Dow Jones Industrial Average lost more than 650 points, or nearly 2%, for the day. The very low interest rates, maintained by the Fed, have been a key factor in pushing stock prices to historic highs since the start of the pandemic.
“He had a decidedly more hawkish tone than I expected and, I think, what the financial markets expected,” said Kathy Bostjancic, chief financial economist in the United States at Oxford Economics. (Hawks typically prefer higher borrowing costs to suppress inflation, while Doves typically emphasize lower rates to fuel hiring.)
Fed policymakers have come under pressure from a sharp rise in inflation, as consumer prices climbed 6.2% in October from a year earlier, the highest inflation rate in 31 years. In response, some Fed officials in recent weeks had already started pushing for a faster cut in central bank bond purchases.
Yet the sudden emergence of the omicron variant had led some Fed watchers to speculate that the central bank would avoid any major policy changes until a clearer picture of the variant and its likely impact on the economy emerges. But Powell’s remarks on Tuesday – and the questions he faced from senators – focused much more on inflation than the likelihood that little is known of omicron could seriously weaken the economy. .
“The economy is very strong and inflationary pressures are high,” said Powell. “So it is appropriate, in my opinion, to consider closing the taper of our asset purchases … perhaps a few months earlier.”
“It’s a very steep pivot for the Fed,” said Krishna Guha, analyst at investment bank Evercore ISI. “The eight-month reduction plan was announced just four weeks ago. “
Under fire from some Senate Republicans over worsening inflation, Powell suggested that price increases would likely slow next year as supply bottlenecks ease. But he also acknowledged that the price increases have spread to broader categories of products and services, and as a result “the risk of higher inflation has increased”.
For months, Powell and other Fed officials called inflation “transient,” which didn’t necessarily mean they thought it would go away soon, but that it wouldn’t continue to skyrocket. . This prospect has so far proven to be overly optimistic, and Powell said it was “probably a good time to take that word out and try to make it clearer what we mean.”
The Fed chairman said he believed central bank policymakers would know more about the potential economic impact of the omicron variant in time for their next meeting in mid-December.
Regardless of the possible consequences, the omicron variant looks sure to complicate Powell’s job next year. If omicron drives a new wave of plant and port closures in the United States and abroad, supply chain bottlenecks could worsen and further increase prices.
At the same time, omicron could reignite the fears of many workers of being infected at work, leading to more quits when departures have already reached an all-time high or discouraging some of those who are unemployed from taking on new jobs. This could weaken the labor market and the economy. In such a scenario, the Fed’s dual mandate of stable prices and maximum employment could come into conflict.
In a significant change, Powell appeared to make tackling inflation a more urgent priority than job growth by noting that higher prices themselves threaten economic recovery. And a long period of growth, he said, is needed to regain the “big job market” that existed before the pandemic.
“We’re going to need a long expansion,” said the Fed chairman. to such a labor market.
Rising inflation has put the Fed in dire straits as the economy remains at about 4 million jobs below pre-pandemic levels, and many Democrats in Congress will want rates to stay close to zero until most of those jobs have been recovered.
“The Fed cannot put the brakes on our economic recovery too soon, before workers have a chance to fully bounce back,” said Sen. Sherrod Brown, the Ohio Democrat who chairs the banking committee. “And I mean all workers,” he added, noting that the unemployment rate for blacks remains double that of white Americans.
In contrast, Sen. Pat Toomey of Pennsylvania, the committee’s senior Republican, suggested the economy had largely recovered about a year ago. As a result, emergency measures, such as the Fed’s bond purchases, have not been needed since then, he said.
Treasury Secretary Janet Yellen, who also testified before the Senate banking panel on Tuesday, urged Congress to increase the country’s borrowing limit. Yellen previously warned that without an increase in the debt ceiling, the government could default on its debt obligations for the first time soon after December 15.
“I cannot stress enough that it is essential that Congress address this issue,” she said. “America needs to pay its bills on time and in full. If we don’t, we’ll gut our current recovery. “
Congress, which is expected to tackle the borrowing limit, also faces a Friday deadline to provide enough funds to keep the federal government open.
Yellen also said that for now, the economic recovery “remains strong,” but she urged Americans to get vaccinated or receive boosters to guard against the omicron variant.
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