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Powell says Fed can accelerate bond cuts to tackle inflation | Business and Economic News

Federal Reserve Chairman Jerome Powell said Tuesday that the U.S. central bank will look to act faster to push back its ultra-low interest rate policies to address higher inflation, Powell acknowledged, which is likely to last over the next year.

The Fed is currently slashing its monthly bond purchases, which reduce longer-term borrowing costs, at a rate that would end those purchases in June. But Powell made it clear that Fed officials will discuss those purchases more quickly when they meet in mid-December next year.

Doing so would pave the way for the Fed to start raising the key short-term rate in the first half of next year. A higher Fed rate, in turn, would raise the borrowing costs of mortgages, credit cards and some business loans.

“The economy is very strong and inflationary pressures are high,” Powell said in a Senate Banking Committee hearing. “That’s why I think it’s appropriate to limit the purchase of our assets … maybe a few months in advance.”

Powell also said the Fed should know more about the impact the coronary virus Omicron variant could have on the economy by this next meeting. But he suggested that for now Omicron has not affected the Fed’s economic outlook much.

The recent rise in Delta cases and the emergence of Omicron “exacerbate the poor risks of employment and economic activity and the uncertainty of inflation,” Powell said in statements prepared Tuesday. The new variant could also worsen supply chain disruptions, he said.

Powell’s comments in recent weeks have been made by other Fed officials when the central bank should consider reducing its ultra-low interest rate policies faster than currently anticipated. They mentioned concerns about inflation as it jumped to a three-decade high.

The additional uncertainty created by the Omicron variant could complicate the Fed’s next steps.

“Greater concern about the virus may reduce people’s willingness to work, which will slow progress in the labor market and increase supply chain disruptions,” Powell said.

We definitely know very little about the health effects of the Omicron variant. But if Americans cause spending to slow down and the economy to slow down, that could ease inflationary pressures in the coming months.

However, if the new variant causes another surge in plant and port closures in the U.S. and abroad, this could worsen supply chain silence, especially if Americans continue to buy more furniture, appliances and other goods. This, in turn, could drive up prices even further in the coming months.

Finance Secretary Janet Yellen also testified before the Senate Banking Panel and called on Congress to raise the nation’s debt limit. Yellen had previously warned that without a rise in the debt ceiling, the U.S. government could meet its debt obligations for the first time since Dec. 15.

“I can’t say too much about how critical Congress is to address this issue,” Yellen said. “America has to pay its bills on time and in full. If we don’t, we will eliminate our current recovery.”

Congress is expected to face a debt limit and will also face a deadline on Friday to provide enough funding to keep the federal government open.

Yellen also said that for the time being the economic recovery is “still strong,” but urged Americans to get vaccinated or receive booster shots to protect against the Omicron variant.

Powell acknowledged that inflation “imposes significant burdens, especially on those unable to cope with key costs such as food, housing and transportation.”

He said most economists expect inflation to decline over time as supply reductions ease, but added that “the factors driving upward inflation will continue next year.” At a press conference last month, Powell said high inflation could last into late summer.

At their last meeting on Nov. 2-3, Fed officials agreed that the central bank would start reducing its $ 120 billion in monthly bond purchases by $ 15 billion a month. That would end the shopping in June.

These bond purchases, an emergency measure that began last year, are intended to sustain longer-term interest rates to encourage more lending and spending. The Fed has set the short-term interest rate at almost zero, which has affected other borrowing costs, such as mortgages and credit cards, since the first COVID-19 erupted last March.

Last week, the Fed released minutes of the November meeting, and some of the 17 Fed politicians supported a reduction in bond purchases faster, especially if inflation worsens. This would allow the Fed to raise its benchmark rate in the first half of next year.

At the time, investors expected a three-year rate hike next year, but the odds of many hikes have dropped significantly since the new coronavirus variant appeared.




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