The Oklahoman

Dilemma for Fed chief: High inflation and a surging virus

Powell may give clues on changes in speech

- Christophe­r Rugaber

WASHINGTON – Not long ago, anticipati­on was high that Federal Reserve Chair Jerome Powell might begin to sketch out a plan this week for the Fed to start pulling back on its support for an economy that has been steadily strengthen­ing.

That was before COVID-19 cases began accelerati­ng across the country. Now, the decision of how and when the Fed should begin dialing back its help for the economy has become more complicate­d.

In outlining his view of the economy

and the threats it faces in a high-profile speech Friday, Powell might provide clues to the timing of changes in the Fed’s ultra-low-interest rate policies.

The big question has been when the Fed will begin to slow its purchases of Treasury and mortgage bonds. The Fed has been buying $120 billion in bonds each month since the pandemic erupted in March 2020 to keep longer-term rates low and encourage borrowing and spending. It has also pegged its shortterm benchmark interest rate at nearly zero since then.

Powell will speak Friday at an annual conference of academics and central bankers. The conference, sponsored by the Federal Reserve Bank of Kansas City and normally held in Jackson Hole, Wyoming, will instead be a virtual-only event for the second straight year.

Just a few weeks ago, many Fed officials were signaling that the economy was making solid progress toward the central bank’s twin goals of maximum employment and annual inflation at just above 2% for a sustained period. Several presidents of regional Federal Reserve Banks said they wanted to announce a reduction, or taper, of the bond purchases at the Fed’s next meeting in September.

Yet some economists have been slashing their forecasts for economic growth in the current July-September quarter. Restaurant traffic has declined slightly. Last week, Powell said it wasn’t yet clear what the delta strain’s impact would be on the economy. But he emphasized that the pandemic was far from over and was still “casting a shadow on economic activity.”

With the economic picture hazier now, economists will be listening carefully for clues Powell may provide about the Fed’s intentions.

“I’ll be watching how he characteri­zes current conditions and the outlook he has for the economy,” said Ellen Gaske, an economist at PGIM Fixed Income. “That will give us a sense of how soon the tapering will occur.”

The uncertaint­ies raised by the delta variant make it likelier that the Fed will announce a tapering in November or later, economists said, rather than in September. That would allow Fed officials to consider two additional months of data on inflation and jobs to gauge the delta variant’s impact.

Inflation has surged to a three-decade high as a sharp rebound in consumer spending and shortages in many commoditie­s and parts, such as semiconduc­tors, have sent prices rising for airline tickets, hotel rooms, new and used cars and restaurant meals. The Fed’s preferred inflation gauge jumped 3.5% in June compared with a year earlier, the biggest such rise since 1991.

Higher inflation has intensified pressure on Powell and the Fed to rein in their stimulus policies. Powell has expressed confidence that higher inflation will prove temporary, even if it persists for several more months. Many economists and Wall Street investors agree. Some, in fact, are more concerned about the opposite problem: That inflation will decline too far from its current level.

At the same time, growth could slow. Government stimulus is set to fade next year. No more stimulus checks are in the pipeline, and a $300-a-week federal unemployme­nt supplement is set to expire in two weeks. Gaske noted that the price jumps have caused consumers to reduce their spending on things like cars and furniture, which over time reduces inflation pressures.

That’s in contrast to the late 1970s, the last time the United States faced rapid inflation, when rising prices encouraged a “buy it while you can” mentality, Gaske said. Ongoing spending at that time drove costs even higher.

As a result, any pullback in the Fed’s low-rate policies could help pull inflation below its 2% annual target in a year or two.

It’s also getting harder for the Fed to define its other policy goal of “maximum employment.” Initially Powell and other officials, including Vice Chair Richard Clarida, defined it as a “broad and inclusive” goal that included sharply reducing unemployme­nt for Black Americans and Latinos and restoring the job market to its pre-pandemic health.

Yet the number of older Americans who are retiring has accelerate­d since the pandemic struck, and it’s far from clear that low interest rates would induce many of them to return to work. A smaller workforce could make it harder to restore the job market to pre-pandemic levels.

Many economists were surprised by remarks from Clarida this month suggesting that a return to an unemployme­nt rate of 3.8% would meet the Fed’s goal of maximum employment and justify a rate hike by the end of 2022, earlier than Fed officials had projected in June.

Even if the jobless rate falls that low (it’s now 5.4%), millions of Americans could remain on the sidelines, no longer looking for work and therefore not counted as unemployed. Black and Latino Americans would likely have much higher unemployme­nt rates. Fed officials had previously made clear that they would take those concerns into account, but Clarida did not mention them.

 ?? GRAEME JENNINGS/AP ?? Economists will be listening Friday for clues Jerome Powell might provide about the Federal Reserve’s intentions.
GRAEME JENNINGS/AP Economists will be listening Friday for clues Jerome Powell might provide about the Federal Reserve’s intentions.

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