Fed: Inflation Hotter Than Expected, But Still Temporary
In a statement released yesterday afternoon, the Federal Reserve Board outlined its expectations for the remainder of the year and touched on current market concerns.
It stated that as vaccine rates have increased and policy has supported the recovery, “indicators of economic activity and employment have continued to strengthen.” The hardest-hit sectors during the pandemic, like the leisure and hospitality industry, have improved in recent months despite a spike in COVID-19 cases fueled by the Delta variant which has slowed their recovery fully.
The Fed acknowledged that inflation is elevated, but interestingly, maintained the position that it is “largely reflecting transitory factors.”
At the end of a two-day policy meeting Wednesday, members of the committee said they predicted an annual inflation rate of 4.2% by the end of the year. This is an adjusted figure up from the 3.4% they predicted in June. Nonetheless, they estimate inflation will fall to around 2.2% next year.
Fed Chair Jerome Powell maintains that inflation is still lingering because of supply-chain issues that have lasted longer than expected.
In a press conference, he stated, “As the reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and longer-lasting than anticipated, posing upside risks to inflation.”
He added that while these supply issues are prominent and driving inflation for now, “they will abate … and as they do, inflation is expected to drop back toward our longer-run goal.”
Powell referenced the automotive industry, whose unprecedented shortage of semiconductor chips is enduring even after months of holding up production and hiking prices for all types of vehicles throughout global markets.
That goal includes a steady rate of inflation and full employment. These conditions have long been the parameters set forth by the Fed to finally lift interest rates.
Powell added that no definitive decisions were made regarding the liftoff during the Fed’s most recent meeting, but that “so long as the recovery remains on track, a gradual appearing around the middle of next year is likely to be appropriate,” signaling that around June 2022 we could see the first rate hike.
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