Federal Reserve Chairman Jerome Powell said on Tuesday that the U.S. central bank will consider taking more rapid action to withdraw the ultra-low interest rate policy in response to rising inflation. Powell admitted that inflation may continue into next year.
The Federal Reserve is currently reducing its monthly bond purchases in an effort to reduce long-term borrowing costs, and its purchase rate will end in June. But Powell made it clear that Fed officials will discuss cutting these purchases faster at the next meeting in mid-December.
Doing so will put the Fed on the path of raising its key short-term interest rates as early as the first half of next year. Higher Fed interest rates will in turn increase the cost of borrowing mortgages, credit cards and some commercial loans.
“The economy is very strong and inflationary pressures are high,” Powell said at the Senate Banking Committee hearing. “So, in my opinion, it is appropriate to consider ending our asset purchase plan…maybe a few months in advance.”
Powell also said that the Fed should learn more about the potential economic impact of the Omicron variant of the new coronavirus before the next meeting. But he said that for now, Omicron has not had much impact on the Fed’s economic prospects.
In his prepared speech on Tuesday, Powell stated that the recent increase in Delta cases and the emergence of Omicron “brought downside risks to employment and economic activity, and increased inflation uncertainty.” He said the new variants may also exacerbate supply chain disruptions.
Powell’s remarks come after other Fed officials have stated in recent weeks that the Fed should consider ending its ultra-low interest rate policy sooner than currently planned. They mentioned concerns about inflation, which has jumped to a three-year high.
The additional uncertainty caused by the Omicron variant may complicate the Fed’s next move.
“Bigger concerns about the virus may reduce people’s willingness to work in person, which will slow the progress of the labor market and exacerbate supply chain disruptions,” Powell said.
Little is known about the health effects of Omicron variants. But if this causes Americans to reduce spending and slow economic growth, then inflationary pressures in the coming months may be eased.
However, if the new version causes another wave of factory and port closures in the United States and overseas, this may exacerbate the chaos in the supply chain, especially if Americans continue to buy more furniture, electrical appliances and other goods. In turn, this may push up prices in the coming months.
Treasury Secretary Janet Yellen also testified on the Senate Banking Panel and urged Congress to increase the country’s borrowing limit. Yellen previously warned that if the debt ceiling is not raised, the US government may default on the contract for the first time shortly after December 15.
“I can’t exaggerate the importance of Congress solving this problem,” Yellen said. “The United States must pay its bills on time and in full. If we don’t, we will undermine our current recovery.”
Congress is expected to resolve the issue of borrowing restrictions and is also facing a deadline on Friday to provide sufficient funds to keep the federal government open.
Yellen also said that for now, the economic recovery is “still strong,” but she urges Americans to get vaccinated or booster shots to prevent the Omicron variant.
Powell admitted that inflation “has a heavy burden on people, especially those who cannot meet the higher costs of necessities such as food, housing, and transportation.”
He said that as supply constraints ease, most economists expect inflation to subside over time, but added that “the factors pushing up inflation will continue into next year.” At a press conference last month, Powell stated that high inflation may continue until the end of summer.
At the last meeting on November 2nd to 3rd, Fed policymakers agreed to start reducing the central bank’s monthly bond purchases of US$120 billion by US$15 billion. This will bring the purchase to an end in June.
These bond purchases were an emergency measure that began last year to lower long-term interest rates to encourage more borrowing and spending. Since the first outbreak of COVID-19 in March last year, the Federal Reserve has reduced short-term interest rates that affect other borrowing costs such as mortgages and credit cards to almost zero.
Last week, the minutes of the Fed’s November meeting revealed that some of the 17 Fed policymakers support faster bond purchases, especially as inflation worsens. This will give the Fed a chance to raise its benchmark interest rate as early as the first half of next year.
At that time, investors were expected to raise interest rates three times next year, but since the emergence of the new variant of the coronavirus, the chances of multiple interest rate hikes have fallen sharply.