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Fed begins shedding support to the economy as inflation concerns mount

The Federal Reserve will begin recalling the extraordinary economic aid it has provided since the pandemic broke out in early 2020, a response to high inflation that is now likely to last longer than it did just a few months ago. As expected, the central bank left rates unchanged.

In a statement Wednesday after its last monetary policy meeting, the Fed said it would reduce its $ 120 billion monthly bond purchases by $ 15 billion a month over the coming weeks, but reserves the right to change the pace to change the throttling. These purchases should keep long-term interest rates low to encourage borrowing and spending. As the economy recovers, this is no longer necessary.

The Fed’s comments on inflation, which Fed Chairman Jerome Powell, have repeatedly called “temporary”, have received a lot of attention from investors and economists. Still, the consumer price index – which measures the cost of goods like housing and cars – has been rising since April, with inflation hovering between 4% and 5%.

Many economists expect the supply chain bottlenecks to contribute higher inflation will soon dissipate will persist well into 2022. Even so, the Fed stuck to its stance on Wednesday that inflation was “temporary”.

In a press conference following the release of its Fed Policy Statement, Powell attributed the inflationary pressures that are driving prices up mainly to factors related to the Fed COVID-19 Pandemic and supply and demand imbalances.

“The statement adds something to the inflation assessment, but the language is still surprisingly reserved,” Paul Ashworth, US chief economist at Capital Economics, told investors in a research note. “The previous statement said that ‘inflation has increased, largely reflecting temporary factors’, while the new statement said that ‘inflation is increased and largely reflects factors that are expected to be temporary’. “


IMF chief economist on inflationary pressures

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The Fed will increase its $ 80 billion in US Treasury bond purchases, suggesting the central bank may decide to accelerate its bond buying retreat if inflation worsens.

According to the Federal Reserve Bank of Minneapolis, inflation is expected to be close to 5% for 2021. That annoys Americans about the country’s financial prospects, with more than 6 in 10 saying the economy is bad, according to a poll by the Associated Press-NORC Center for Public Affairs Research.

The Fed underlined that the country’s economic recovery depends “on the course of the virus”.

“Advances in vaccination and a relaxation of supply restrictions are expected to support further growth in activity and employment, as well as a decline in inflation,” the statement said.

Price increases next year?

If the pace was maintained, bond purchases would end entirely in June. At that point, the Fed could decide to raise its short-term benchmark rate on many consumer and corporate loans.

The changes reflect a central bank rapidly shifting from its efforts to stimulate the economy and encourage more recruitment to a central bank increasingly focused on rising inflation. In September, year-over-year prices rose as fast as they have been in three decades. The Fed is now faced with the delicate task of easing its low interest rate policy, which it hopes will curb inflation without doing so quickly to weaken the labor market or even cause another recession.

The economy has steadily recovered from the pandemic recession, although growth and hiring stalled in the July-September quarter, in part because a surge in Delta cases prevented many people from traveling, shopping and eating out.

Many economists are confident that employment growth will pick up in October after the slow pace in September with increasing vaccinations and a waning delta wave. The job report for October will be published on Friday.

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