The Fed Finally Raises Expectations on Inflation
Although Wall Street and manufacturers have been lamenting for months, the Federal Reserve finally conceded and significantly raised its expectations for the rise in inflation this year, while also upping the timeline on the next interest rate hike.
For the better part of 2021, professional investors, hedge funds and manufacturers have been warning the Fed that the rise in prices is real — the opposite of the transitory recommendation on inflation the committee has refused to waver on until now.
Federal Reserve Chair Jerome Powell stated earlier this year that the recent rise in prices was due to temporary pressures caused by the ongoing coronavirus pandemic. He and U.S. Treasury Secretary Janet Yellen largely held their positions that slow vaccination rates, barriers to workforce re-entry and supply chain disruptions were the root cause of inflated prices. They maintained that once vaccination rates increased and the labor market loosened, supply chain disruptions that have been causing a historic rise in prices would eventually ease.
Every quarter the 18 members of the Federal Open Market Committee meet to discuss where they believe interest rates will go. In March, four of the 18 members were seeking a rate hike in 2022, with seven members seeking a rate hike in 2023. Now, 13 members of the FOMC are seeking a rate hike in 2023 — almost double the amount of Fed members than before.
Dow futures dropped 70 points following the Fed announcement, CNBC reports.
A major contribution to the rise in prices has been supply chain disruptions at factories and ports throughout the world. Sudden increased demand and factories that are unable to fill orders in time due to commodity restrictions and tight labor markets has resulted in upward price pressures that have not tapered off as quickly as the Fed thought they might have. Investors have been warning the committee for months to consider pulling back on their easy monetary policy for fears of an overheated economy.
In a statement released by the FOMC, the members informed that current interest rates would remain unchanged at least until the end of the year. The current course is to maintain easy monetary policy to assist in the economic recovery post-pandemic, with a plan for two rate hikes in 2023.
In a news conference post-meeting, Powell stated, “Our expectation is these high inflation readings now will abate,’ meaning that even with consensus amongst members on runaway prices, they still believe them to be temporary.
He did though later admit that the reopening of the economy has perhaps been rockier than first anticipated stating that some of the problems associated with the recovery are “raising the possibility that inflation could turn out to be higher and more persistent than we anticipate.”
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