On Tuesday, Chairman Jerome Powell told Congress that the Federal Reserve was ready to accelerate rate hikes, which it plans to begin this year, if it deems it necessary to contain high inflation. Fed officials expect they will hike their short-term policy rate, which is now near zero, three times this year. Many economists expect up to four rate hikes by the Fed in 2022.
These rate hikes would likely increase the cost of borrowing on home, auto and business borrowing, and potentially slow the economy. The rate hikes also mark a sharp turn in the policy of Fed politicians, who were still split in September over whether to hike rates even once this year. The Fed is also swiftly ending its monthly bond purchases, which should lower longer-term interest rates to encourage borrowing and spending.
Still, the Fed’s swift swing has not allayed questions from many former Fed officials, economists, and some senators as to whether the Fed acted too slowly, in the face of accelerating inflation, to end its ultra-low interest rate policy – and thereby endangered the economy.
Speaking to Congress on Tuesday, Powell said the Fed mistakenly believes that supply chain bottlenecks that helped drive goods prices so high won’t last anywhere near as long. As soon as the supply chains are deciphered, prices would fall again.
For now, however, supply issues persist and while there are signs of easing in some industries, Powell acknowledged that progress has been limited. He found that many cargo ships were anchored outside the port of Los Angeles and Long Beach, the largest in the country, waiting to be unloaded.
As the Biden administration faces public discontent over the rise in inflation, President Joe Biden said said his government’s investments in ports, roads, bridges and other infrastructure would alleviate inflation by easing some tangled supply chains.
Many restaurants now pass on part of their higher labor and food costs to their customers in the form of higher prices. So far, many consumers seem willing to pay more. Gene Lee, CEO of Darden Restaurants, which owns Olive Garden and other brands, recently told investors that this was “the toughest inflationary environment in years”.
The company said its food and beverage costs rose 9% for the quarter and its hourly labor costs rose nearly 9% as wages were raised to attract workers. Darden said it hiked its prices another 2% during the quarter and expects to hike them 4% over the next two quarters to make up for this. Rick Cardenas, the company’s president and chief operating officer, said these higher prices must further reduce consumer demand.