The Fed stresses gradual and deliberate movement when handling inflation

The Fed stresses gradual and deliberate movement when handling inflation
FILE PHOTO: A U.S. Dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

The backstory:

  • Many of you know that inflation is quite high right now because of the pandemic. Demand roared back at a much faster rate than people expected, and supply chain issues made it difficult to meet this demand. These factors contributed to inflation reaching global highs.
  • In the United States, inflation hit 7%, when the target is about 2-3%, and with this, Federal Chair Jerome Powell has said that the Fed’s focus will shift to controlling prices.
  • This is while interest rates remain close to zero, the US economy edges close to full employment and major banks and investors are anticipating aggressive monetary policy action to bring inflation under control.
  • And, the US isn’t alone here. Canada has signaled a rate hike, and South Africa increased borrowing costs this month. Hungary, Chile and Singapore all have tightened policies.
  • In response to this, at a World Economic Forum event mid this month, China’s President Xi warned against sudden pivots in fiscal and monetary policies, saying that “We should coordinate the targets, intensity and rhythm of fiscal and monetary policies, and major developed countries should control the spillover effects of their policies to avoid shocks to developing countries.”

The development:

  • Last week, Powell didn’t provide specifics on how the Fed would be acting, but he did say that support should be removed steadily and that policies would be put in place in response to economic data.
  • Fed officials have reiterated this stance, saying they want to avoid unnecessarily disrupting the economy.
  • Speaking to the Economic Club of Indiana, Kansas City Fed President Esther George, who’s one of the central bank’s more hawkish officials and a policy voter this year, said: “You always want to go gradually, in the economy. It is in no one’s interest to try to upset the economy with unexpected adjustments. But I do think the Federal Reserve is going to have to move deliberately in its decisions to begin to withdraw accommodation.”

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