Prices are rising in the United States, so inflation will be among the most prominent axes of the US Federal Reserve meeting, which performs the tasks of the central bank, on Tuesday and Wednesday, but it seems that more is needed to convince it to reduce its support for the economy, starting with a more improvement in employment.
Cars, homes, fuel, clothes and other goods are costing the pockets of Americans more, but it is expected that the President of the US Federal Reserve, Jerome Powell, will abide by the measures previously approved by his institution, while making sure that the price hike is temporary.
For months, the official has been downplaying fears of a recurrence of the hyperinflation that the country witnessed in the 1970s.
And Cathy Bostancik, an expert at Oxford Economics, expects that “Federal Reserve officials will continue to predict that the current imbalance between supply and demand will resolve in the coming months.”
The increase in prices reached 5 percent in May, compared to last year, according to the Consumer Price Index (CPI), which is certainly a large jump, but it is due, in large part, to the impact of the comparison with prices that fell in the spring of 2020.
The Federal Reserve uses another measure of inflation, the Personal Consumption Expenditure Index (PCE), which in April saw its strongest acceleration since 2007, up 3.6 percent in one year.
Recruitment dilemma
The Federal Reserve is watching inflation closely, but it is unlikely that it will decide this week to reduce its support for the US economy.
The country is still far from fully recovering from the crisis caused by the Corona virus, and from achieving the level of full employment that the Central Bank is aiming for. A rapid abandonment of extraordinary measures could threaten prospects for a sustainable recovery, particularly in the labor market.
The unemployment rate fell to 5.8 percent, but it remains far from the previous rate of the crisis, which amounted to 3.5 percent, and there is still a difference of 7.6 million jobs compared to the same period.
“No one knows whether people will return to work or not,” says Howard University economics professor Omri Swinton, stressing that “the goal of ensuring that employment resumes strongly is more important than inflation.” Paradoxically, however, American companies are having difficulties finding employees, especially in low-wage jobs, which has prompted them to raise salaries to attract workers, causing inflation.
The country is still far from fully recovering from the crisis caused by the Corona virus, and from achieving the level of full employment that the central bank aims to
“Maybe they won’t raise rates. But I think they’ll have to start thinking about other ways to solve” the problem, adds the Fed economist.
Interest rates are expected to remain at their current level for some time, after they were lowered to a range between zero and 0.25 percent in March 2020.
Each member of the institution’s monetary policy committee will have its say on when it is appropriate to increase it. In March, four of them proposed increasing it from 2022 instead of 2023, while this proposal was supported by only one member in December.
Thinking about the future
With that, the 11 members of the committee can start thinking about the next step. At their last meeting at the end of April, some of them proposed for the first time to start discussing limiting asset buybacks.
The Federal Reserve buys $120 billion in assets each month, including Treasury bonds, with the aim of facilitating borrowing, supporting the recovery and lowering interest rates.
Kathy Bostancik expects a “gradual reduction from early 2022”, before starting to raise rates in 2023.
On the other hand, the financial institution will update its economic forecast. In March, it had forecast GDP growth of 6.5 percent in 2021 and 3.3 percent in 2022.
The Federal Reserve was also optimistic regarding the unemployment rate, as it expected it to decrease to 4.5 percent this year, 3.9 percent in 2022 and 3.5 in 2023, which is the pre-crisis rate and the lowest in 50 years.
As for inflation, it is expected that it will be at the level of 2.4 percent in 2021, before stabilizing in the range of 2 percent in line with its long-term goal.
