Inflation Alarm Bells Are Ringing, So Why Didn’t The Fed Raise Rates This Month?


For now, the central bank will leave rates untouched in the range of 0% to 0.25%

Jerome Powell
YouTube screenshot
Jerome Powell


 Amid a heated debate in Washington over whether easy monetary policy and unprecedented fiscal stimulus spending is actually hampering the economic recovery, Federal Reserve officials on Wednesday signaled that they are looking ahead to two interest rate hikes by the end of 2023—sooner than previously expected but not imminent—as signs of inflation continue to rattle markets.


  • For now, the central bank will leave rates untouched in the range of 0% to 0.25%. 
  • Prices for consumer goods rose 5% in May—the highest jump in 13 years—and producer prices soared a record 6.6% during the same month. 
  • Last August, the Fed announced it would aim for inflation that averages 2% over time rather than adjust policy to prevent inflation from rising above that threshold—that means it’s much more prepared than it used to be to tolerate higher prices. 
  • Officials within the Fed and the Biden Administration have repeatedly argued that price spikes are to be expected as the economy reopens, that those spikes will fade over time as conditions normalize, and Powell on Wednesday emphasized that the central bank would be “prepared to adjust the stance of monetary policy” if confronted with signs that inflation was moving “materially and consistently” above the Fed’s goal of a 2% average over time.
  • On Wednesday, the Fed said it wants to see more progress in the labor market, which is still down 7.6 million jobs since the onset of the pandemic, before it moves to raise rates and tighten policy.
  • To avoid spooking investors and damaging financial markets (and avoid the so-called “taper tantrum” that followed tighter Fed policy after the 2008 financial crisis), the central bank takes pains to give investors plenty of notice before it changes its policies.


“The process of reopening the economy is unprecedented, as was the shutdown at the onset of the pandemic,” Federal Reserve chair Jerome Powell said during a press briefing on Wednesday. “As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect.”


“The longer the Fed delays [tightening policy], the greater the threat it will be forced to slam on the policy brakes down the road,” wrote Mohamed El-Erian, chief economic adviser at Allianz, in a Bloomberg op-ed published Tuesday. “This would, in turn, risk both an economic recession and financial market instability.”


3.4%. That’s the Fed’s prediction for PCE inflation in 2021—up a full percentage point from its March prediction of 2.4%. It expects 7% GDP growth and 4.5%% unemployment for the year.


At the onset of the coronavirus crisis in the United States in March 2020, the Fed slashed interest rates to near-zero levels to prop up the financial sector and has not adjusted them since. The central bank also said it would purchase $700 billion in government debt and continues to buy $120 billion in bonds per month to support that market. In the minutes from its June meeting, the Fed did not specify when it would terminate the bond-buying program.

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