Fed to start reining in economic stimulus as inflation risk rises

WASHINGTON » With inflation at its highest point in three decades, the Federal Reserve is set this week to begin winding down the extraordinary stimulus it has given the economy since the pandemic recession struck early last year, a process that could prove to be a risky balancing act.

Chair Jerome Powell has signaled that the Fed will announce after its policy meeting Wednesday that it will start paring its $120 billion in monthly bond purchases as soon as this month. Those purchases are intended to keep long-term loan rates low to encourage borrowing and spending.

Once the Fed has ended its bond purchases by mid2022, it will then turn to a more difficult decision: When to raise its benchmark short-term rate from zero, where it’s been since COVID-19 hammered the economy in March 2020. Raising that rate, which affects many consumer and business loans, would be intended to make sure inflation doesn’t get out of control. But it would carry the risk of discouraging spending and undercutting the job market and the economy before they’ve regained full health.

“We don’t have a roadmap for what we’re going through,” said Diane Swonk, chief economist at Grant Thornton. Powell has to “walk a tightrope” by supporting the recovery while not “turning a deaf ear to inflation.”

Against that uncertain backdrop, President Joe Biden has yet to announce whether he will re-nominate Powell for another four-year term as Fed chair. Powell’s current term expires in early February, but previous presidents have usually announced such decisions in the late summer or early fall.

Biden is expected to offer Powell a second term despite complaints from progressive groups that the chairman has heightened risks to the financial system by loosening bank regulations and isn’t sufficiently committed to taking account of the economic threats from climate change in the Fed’s oversight of financial firms. Powell is admired on Wall Street and in most economic circles.