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Thursday, January 20, 2022

How much longer can the Fed be boring and predictable? | Business and Economy News

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The Fed, as expected, left its benchmark interest rate unchanged at near zero at the end of its two-day policy meeting, but the US central bank cannot maintain an easy money policy indefinitely.

Whoever said it doesn’t pay to be boring and predictable, never walked a mile in Federal Reserve Chief Jerome Powell’s shoes.

As expected, the Fed closed out its latest two-day policy meeting on Wednesday having kept its benchmark interest rate near zero and without making changes to its bond buying programme designed to keep long-term interest rates low.

In another unsurprising move, policymakers acknowledged that the economy is on the mend without being too effusive.

“The sectors most adversely affected by the pandemic remain weak but have shown improvement,” the Fed said its post-meeting statement.

The restraint is indicative of the tough balancing act Fed officials have to pull off in the coming months.

The Fed slashed interest rates to near zero and unleashed a host of other extraordinary measures last year to keep credit flowing to businesses and households and help the economy survive and heal from the devastating blow delivered by the coronavirus pandemic.

But cheap money can’t be a feature of the nation’s monetary policy indefinitely. Too much easy money for too long risks stoking inflation, which makes the dollar in consumers’ wallets not stretch as far. And once inflation starts getting out of hand, it is very tough to rein in.

Powell has made clear – super clear again and again- that he is not worried about rising prices, which he thinks will be temporary. In fact, the Fed is willing to tolerate inflation trending above its 2 percent target level for a period, if that’s what it takes to help the country’s jobs market recover its pre-pandemic mojo. And the labour market is still 8.4 million jobs shy of recuperating all of the 22 million jobs it lost during the first round of lockdowns last year.

But it’s not just monetary policy that can stoke inflation. Fiscal support – as in Congress stepping up with generous virus relief aid for businesses and households- can also translate into rising prices.

That’s because consumer spending is the engine of the US economy, driving some two-thirds of growth.

The more stimulus money people get from the federal government, the more likely they are to unleash pent-up demand for goods and services. As businesses ramp up operations to cater to those reinvigorated consumers, it can cause bottlenecks in supply chains, and temporary shortages of materials and even labour, causing prices to rise.

Progress on vaccinations – something the Fed acknowledged in its post-meeting statement – is also playing a role, as business-sapping restrictions are rolled back and more Americans feel comfortable re-engaging in activities they skipped prior to getting their jabs.

A lot of data is indicating that the economy is well on the mend. Booming even by some measures.

Retails sales rebounded in March, especially when it came to consumer spending in restaurants and bars – a sector that was hardest hit by the pandemic.

The jobs market recovery is gaining strength, with the economy adding 916,000 jobs in March and unemployment edging down to 6 percent. Consumer confidence – a key indicator that gauges how people feel about the economy (gloomy consumers tend to sit on their wallets, while happy ones tend to spend) – hit a 14-month high this month.

As for inflation, consumer prices rose 0.6 percent in March – the biggest one-month jump in more than eight years. Nearly half of that increase was down was due to a sharp rise in petrol prices, which tend to be volatile.

On Thursday, we’ll get the first read on how the US economy grew in the first three month of this year.

The conundrum facing the Fed is how to dial back all the support it has given the economy without triggering a repeat of the 2013 “taper tantrum”. Back then, the Fed found itself in the position of wanting to rein in easy money and raise interest rates. But as soon as it signaled it was even thinking about doing that, financial markets freaked out and sent yields on US Treasuries sharply higher. The spike in treasury yields threatened to derail the US economy’s long, drawn-out recovery from the Great Recession.

Obviously, the Fed would like to keep the current recovery on track. And the economy is recovering at a far faster clip now than it did after the Great Recession.

But at some point – many analysts suspect it will be this summer – Powell and his fellow policy will have to start preparing financial markets for the inevitable. Because easy money can’t last forever.


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