The central bank’s withdrawal has left the financial markets nervous, with the benchmark stock index S&P 500 posting its worst month since March 2020 in September, posing a political threat to President Joe Biden and the Democrats in an election year they are hoping for to be able to indicate a robust recovery.
“The training wheels are kind of gone for the economy,” said Michael Feroli, chief US economist at JPMorgan Chase, the country’s largest bank. “If the party goes on, the Fed has to keep it going.”
That will probably not happen for much longer. Powell admitted at a conference Wednesday that inflationary pressures are likely to persist into next year, even if he expects them to ease at some point. The Fed chairman said he found it “frustrating to see that the bottlenecks and supply chain issues are not getting better – in fact, margins appear to be getting a little worse”. The Fed rose to another 30-year high.
In the depths of the pandemic last year, both Powell’s Fed and Congress took unprecedented steps to prop up businesses, households, and financial markets – pumping trillions of dollars into the economy to fill gaping revenue holes and cheap lending enable. The Fed continues to buy a staggering $ 120 billion in government bonds every month to keep interest rates low.
The speed and power of the reaction worked. US growth is expected to exceed 5 percent this year, the fastest pace in decades. But the coronavirus is still looming in any forecast, and the threat of rising cases as the weather gets colder could dampen growth as little is expected of the kind of short-term relief efforts that Congress last year and a. has passed half. Even the far-reaching legislative packages that the legislature is debating on Capitol Hill now mostly contain measures that would be spread over a period of years.
“We had the perfect confluence of tailwinds” that boosted the economy earlier this year when everything seemed to reopen amid widespread vaccination aided by relief controls and other forms of aid, said Julia Coronado, a former Fed economist and president by MacroPolicy Perspectives. “That’s all in the rearview mirror now.”
Senior White House economic advisers will not publicly urge Powell to maintain ultra-light monetary policy as Washington suffers yet another round of fiscal follies, including the possibility of a debt ceiling fear sometime in mid-October. But privately, they want Powell, who plans to be appointed Fed chairman for a second term later this year, to err on the gentler side, with the unemployment rate still at 5.2 percent while millions of people out of work Americans stay on the sidelines.
Joe Brusuelas, chief economist at midsize consulting firm RSM, said Powell has a fine line to walk: rate hikes aren’t ideal for the White House as the mid-term elections approach, but increased inflation numbers well into next year could cause a number of concerns – which suggests that you need to tighten at least a little.
“While inflation is likely to have peaked, it will remain high for the next two years,” he said. “The Fed cannot ignore that.”
Powell said the Fed expects to slow its bond purchases in November and aims to halt them entirely by the middle of next year, which could trigger a rate hike in the second half of 2022. By then, the central bank will have a much better grip on how distortions in the supply chain drive price increases across the economy.
“These [supply-chain] The impact has been bigger and longer lasting than expected, but it will wear off, ”the Fed chief told lawmakers this week.
The outlook could brighten as the pandemic subsides and the economy is able to stand more firmly on its own to cushion markets from the gradual removal of Fed support and reduce production delays. Shares rose on Friday after news from drug company Merck that its experimental pill was aggressively reducing the chances of being hospitalized or dying from Covid.
“As the economy grows, Washington is becoming less important,” said Richard Bernstein, founder of the investment firm RBA.