A leading Federal Reserve figure said Thursday that the central bank should have acted earlier to withdraw its stimulus from the pandemic era and anticipate rising inflation.
Fed Chairman Jerome Powell told the Senate Banking Committee that with prices rising the fastest since 1982, the Fed’s easy money policies – coupled with longer-than-expected supply chain barriers – appear to be are behind inflation.
“The back point says we had to move earlier,” Powell said Thursday, adding that “we will use our tools and do it.”
When inflation began to rise in early 2021, the Fed removed the figures as “transitional” and hoped that supply chains would ease and slow further price increases.
But Powell now says higher demand for depressed borrowing costs seems to be behind inflation, blaming the Fed for raising interest rates from near-zero levels it has maintained since the pandemic.
Raising rates
Powell told the House Financial Services Committee on Wednesday that the central bank will almost certainly raise interest rates – for the first time since 2019 – at the end of its next policy meeting on March 15th and 16th.
But the “withdrawal” from almost zero interest rates is only the beginning of the battle.
Powell predicted that the first increase in interest rates this month will be 0.25%. Estimates from the Fed itself predict that the economy can withstand short-term interest rates between 2% and 2.5% before policies are considered restrictive.
With emerging geopolitical uncertainty in Ukraine, the Fed intends to act cautiously while raising interest rates. Although some Wall Street stores expected the central bank to move to each of the seven remaining meetings this year, some now say the cloudy economic outlook calls into question the Fed’s ability to respond quickly to inflation.
“I think it will take a long time for this Fed to get the right amount,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments.
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Tengler told Yahoo Finance that he expects the Fed to raise interest rates only three or four times (for a total of 0.75% or 1.00%) this year.
Balance
Another question is the Fed’s balance sheet, which the central bank has raised to $ 9 trillion. Following the depth of the pandemic, the Fed snatched trillions of US bonds and mortgage-backed securities to signal to markets that it intended to support the economy.
The Fed is still shopping, although the program is due to end this month. The next step would be to shrink its assets, allowing assets with maturity to derail.
“We will make progress in agreeing on a plan [the March] a balance sheet meeting and I’m convinced we will, “Powell told the House Financial Services Commission on Wednesday.
Powell has served as a senior Fed official in a “temporary” capacity since his term as Fed chairman expired in early February. His nomination, along with four other Fed election-nominated roles for the Fed, has stalled as Republican senators take a closer look at Sarah Bloom Ruskin’s candidacy for Fed chairman for oversight.
Brian Chung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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